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Current Views

Don't Fear the Curve

Within the community of market analysts, it is well understood that an economic slowdown (and even a recession) can be signaled by an inverted yield curve, with about a year’s lead time, because the inversion in the curve can signal that interest rates in the future may be expected to be lower than rates today.  “Inversion” refers to the fact that the yield on short-term notes exceeds that on longer notes. 

At this writing, the yield on three-month Treasury Bills exceeds the yield on three-year Treasuries, which have the lowest yield on the U. S. Treasury curve.  Do we freak out? 

Probably not!  We believe that the future isn’t always like the past and, after a decade of near-zero rate monetary policy, perhaps the recession-signaling value of the inverted yield curve needs further examination. 

Our working hypothesis is that lower long-term rates have less to do with an economic slowdown and more to do with low inflation expectations and limited economic volatility.   Yes, in the past four years the Fed implemented nine rate increases in the Federal funds target rate of 25 basis points each.  It did this initially to lift the rate out of the post-’08 extreme accommodation approach, because monetary policy generally operates with a lag, to dampen an economy as employment started to soar.  The expectation was that wage pressures would not be far behind employment growth.  The Fed may have hoped to be able to ease inflation expectations in an attempt to control inflationary pressures.  We think that the acceleration in employment is a big story.  We believe that the labor market is solid, which should continue to provide for contributions to consumption, an important driver of economic activity. 

The accelerating inflation story hasn’t played out, or hasn’t played out yet, as inflation has been lower than expected. We chalk this up to technology, demographics, and globalization because together they have held down costs and pricing power. We believe that for the Fed, the dilemma is that the economy is growing and unemployment has dropped, yet inflation hasn’t accelerated.  It’s a good problem to have if you fear inflation, but the Fed may have expected more inflation at this point in time.  Because of this it appears that on the surface, we have restrictive monetary policy and that is why we think calls are now being made by pundits for the Fed to lower rates. 

We believe that the bond market is signaling a healthy economic environment.  Credit markets had a strong first quarter, and to us the tightening of credit spreads is indicative of healthy balance sheets and firms meeting their financial goals.  For us, this translates into what we believe may be a continued period of steady economic growth and returns for investment grade credit securities.  If credit spreads were to widen, that would be a concern for us. 




This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.

Past performance is not a guarantee of future results. Indices are unmanaged and cannot accommodate direct investment. Themes assigned as per Roosevelt Investments’ evaluation. Risk tools may include cash or other securities that we believe possess a low or inverse correlation to the overall market.


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The Roosevelt Investment Group, Inc. is an independent investment management firm that is not affiliated with any parent organization. The Roosevelt Investment Group, Inc. manages equity, fixed income, and balanced assets for primarily U.S. clients. The Roosevelt Investment Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission and notice filed in all 50 states.

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