Bonds Take A Turn

Another yield curve inversion

Image source: psamtik, Vikulin, littlenySTOCK, Carlos Huang - Shutterstock

What's going on?

The gap between what long- and short-term government bonds pay investors has inverted more widely, potentially portending impending recession.

What does this mean?

Yields on long-term government bonds around the world are at their lowest levels in years. Normally, investors demand a higher return on US 10-year bonds than 3-month ones, seeing as their money is locked away for longer. But that relationship is currently topsy-turvy: and Wednesday saw the inversion reach its widest point since 2007 (tweet this). While the key 2-year/10-year relationship remains the right way around, bond investors may be predicting an economic slowdown.

Bonds are in the headlines for other reasons too: financial services firm Morningstar agreed to acquire Canadian credit rating agency DBRS for $670 million late on Wednesday. Three companies currently enjoy 96% of the business of rating companies’ and governments’ debt quality. But with bonds hot property, Morningstar is keen to muscle in: the DBRS takeover will give it 2% of the market. It’s a start…

Why should I care?

For markets: Independent reviews are the best reviews.

The big credit rating agencies have faced increased scrutiny since the last financial crisis. Critics complain that they got too cozy with clients in an attempt to win business, and that bond ratings were deceptively flattering as a result. While this perceived lack of independence may have improved, Morningstar thinks more can be done: transparency advocates may be keen to see the firm replicate the success of its fund ratings business in the bonds space.

Zooming out: Investors pay attention to ratings.

Recession fears have caused some investors to withdraw their money from higher-risk stock market funds: one high-profile British fund recently shrank by $700 million in four weeks. While mostly down to weakening performance, investors actively withdrew $250 million after the fund was downgraded last week by (drum roll) Morningstar. While there’s usually a two-year gap between bond yield inversions and recession, the fund management industry could be in for a few more bumps before then…

Originally posted as part of the Finimize daily email.

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