Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Fixed-Income Insights

Historically, the initial 12 months following an inversion have been generally positive for many asset classes, including short-term corporate bonds and tax-free municipal bonds. 

There have been numerous news reports on the slope of the U.S. Treasury yield curve.  The current inversion of the Treasury curve, with the 10-year bond offering a lower yield than 3-month Treasury bills, has garnered significant attention, since such inversions have often, but not always, preceded U.S. recessions in the past.

While it may be dangerous to say “it’s different this time,” there are a number of factors to keep in mind. Lord Abbett investment professionals have recently noted that:

One other factor to consider is the absolute level of rates, as illustrated in Chart 1, which compares the slope of the 3-month/10-year Treasury curve to the fed funds target rate.

 

Chart 1. The Previous Five Yield-Curve Inversions Occurred During Tightening Cycles
Yield on U.S. Treasuries for indicated maturities and fed funds rates (January1, 1977-June 4, 2019)

Source: Bloomberg. The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.

 

Going in reverse chronological order, the previous curve inversions in 2006, 2000 and 1988 occurred during tightening cycles when the U.S. Federal Reserve Board (Fed) increased their target fed funds rate to 5.25%, 6.50% and 9.75% respectively.

Turning the clock back further, the Fed had tightened overnight rates to 20.0% in 1980 and 10.0% in 1978 as inflation (as measured by the U.S. Consumer Price Index) reached double digits.  Clearly, today’s environment, with the fed funds rate at only 2.50% - and the Fed signaling its intention to pause its rate hikes and potentially begin to cut rates in 2019 - is quite different.

Still, we have had many client inquiries about asset-class performance during previous inversions. Table 1 summarizes how U.S. large-cap equities, the broader bond market, investment-grade and high-yield short-term corporate bonds, and the broad municipal bond market have fared following the previous three inversions.

 

Table 1. The Initial 12 Months Following the Last Three Inversions Were Positive for Many Asset Classes
12-month returns of selected indexes following the last three yield-curve inversions on dates indicated

Source: Bloomberg. Barclays Aggregate = Bloomberg Barclays U.S. Aggregate Bond Index, which represents the U.S. investment-grade fixed-rate bond market. Short-term corporates = ICE BofA/ML 1-3 Year U.S. Corporate Index. Short-term high-yield corporates = Bloomberg Barclays U.S. Corporate 1-3 Year High Yield Bond Index. Municipal bonds = Bloomberg Barclays Municipal Bond Index.  The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.

 

It’s difficult to draw direct comparisons to past periods since there have only been a few instances—just three periods in the past 35 years—with each period having its own unique circumstances and exogenous factors.  For example, the three inversions listed in the table were followed by the bursting of the housing bubble in 2008, the tech and telecom bubble in 2000, and the Gulf War and oil price spike in 1990.  These events led to very difficult economic environments and periods of negative performance for many risk assets—in some cases a few years after the initial curve inversion.

However, as the table illustrates, the initial 12 months following the last three inversions were generally positive for many asset classes, including short-term corporate bonds and tax-free municipal bonds.  As we all know, past performance is no indication of future results.

Elsewhere on lordabbett.com, we have noted that most data points from leading economic indicators and broad financial conditions contradict the negative signal coming from the shape of the yield curve and suggest the end of the economic expansion is not on the near term horizon.  As such, we believe equity and credit-sensitive fixed- income sectors should continue to fare well.   

The current environment is very different from the conditions of previous inversions. We believe there is no need to overreact and change portfolio positioning based on a single signal—one that has been demonstrated to be an unreliable predictor of economic performance.

 

About The Author

RELATED FUND
The Lord Abbett Intermediate Tax Free mutual fund seeks to deliver a high level of income exempt from federal taxation. View portfolio and performance.
RELATED FUND
The Lord Abbett Short Duration Income Fund seeks to deliver a high level of current income consistent with the preservation of capital. Learn more.
image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field