Yield curve inversion flashes recession warning

August 14, 2019 | Hedge Funds

Yield curves have inverted on both sides of the Atlantic following the release of weak economic data across the globe

Yield curve inversion, a phenomenon where longer-term yields fall below short-term yields, was on full display in the U.K. and the U.S. Wednesday.

In the U.S., 10-year yields were poised at 1.62% while two-year yields dropped to 1.63%. Across the pond, in the U.K., the 10-year and 2-year yields quoted 0.475% and 0.478% respectively.

The immediate cause is a rising fear of a global growth crunch.

Recession fears worldwide

Investors were spooked today by soft economic data from powerhouse economies such as China and Germany.

“It’s all doom and gloom on the global economy,” said Marc Ostwald, global strategist at ADM Investor Services in London.

Yield curve inversions in the past have traditionally been reliable harbingers of a recession.

Another recession warning comes from the New York Fed. Its index of the probability of a recession over the coming year is 31%, the highest since the last crisis.

Alternative investments: Funds for taking shelter

Alternative funds can protect against a market crash, though investors should not expect them to beat the major market indices.

Here’s a strategy for rocky times and a yield curve inversion.

Invest up to 10% of your portfolio in the following trio of fund types:

  • Market-neutral funds, such as a merger-arbitrage fund
  • Options-based funds that hedge an equity portfolio with options
  • Long-short stock funds that take long positions in some stocks and short on others

Note that these are only protective, ‘seat-belt’ type of investments suited for risky environments.

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