Adding to Your “Investor Toolbox”
Here at Money & Crisis, it is my job to prepare you for the next financial crisis – so that you can make money no matter what’s coming down the pike.
Of course, the biggest part of that involves me covering everything from geopolitics to international trade to economics. I break it all down for you.
Another part is giving you the tools necessary to catch warning signs yourself…
Together, you’ll be a stronger, more prepared investor.
Today I’d like to review one of those lessons.
How to Spot a Well-Behaving Bond Market
It’s crucial that we’re always tracking the behavior of the U.S. bond market.
Reason being, the bond market is significantly larger and more sophisticated than the stock market.
Because of this, bonds typically register major changes in the U.S. economy and the financial markets long before stocks, making them a great predictor for what’s to come.
As such, we need to understand what a functioning bond market looks like ― so we know how to identify a breakdown.
When we talk about the Treasury market, we’re actually talking about Treasury Bonds that are issued for different time periods ― ranging from four weeks to 30 years.
Of these various bonds, two are considered the most important for examining economic developments: the Three-Month Treasury and the 10-Year Treasury.
These two Treasuries are most important for a simple reason.
Three months represents an economic quarter… 10 years typically encompasses an entire economic cycle (both growth and contraction).
Together, the yields on these two Treasuries are called the yield curve.
It’s called a “curve” because under normal conditions, bond investors demand that a Treasury bond pay them a greater yield for lending their money to the U.S. for a longer time period.
So under normal conditions, the yield on the 10-Year Treasury is greater than the yield on the Three-Month Treasury.
Of course, when things are operating as normal we don’t need to worry. It’s when the bond markets enter a period of abnormal conditions ― called a yield curve inversion ― that we need to pay attention…
Identifying a Breakdown in Bonds
Perhaps the single most dreaded bond market signal is a yield curve inversion – something you’ve likely heard about in the financial media recently.
This is when the yield on the Three-Month Treasury is HIGHER than the yield on the 10-Year Treasury.
This happens when investors are dumping short-term, Three-Month Treasuries ― forcing the yields on those bonds to RISE…
And instead putting their capital into long-term, 10-Year Treasuries ― forcing the yields on those bonds to FALL…
In simple terms, this is the bond markets way of saying, “I’m REALLY worried about the near future… so I’m going to park my capital in a long-term bond where it will be safe.”
And when are bond markets most worried about the near future? In a recession.
Take a look at the chart below of the Three-Month Treasury and 10- Year Treasury yield curve.
The horizontal line represents when the difference between these two bonds’ yields is zero. So anytime the orange line (representing the Three- Month and 10-Year Treasuries) falls below the horizontal black line, the yield curve is inverted.
Now, the three gray shaded areas on the chart are recessions.
So as you can see, recessions hit roughly 12 months after every yield curve inversion.
Why am I mentioning this now?
Because the bond market triggered a new yield curve inversion in the last week of May. And then again in mid-August!
Now, a temporary yield curve inversion can happen and it’s no big deal. But once you start seeing it happen repeatedly ― like multiple times so far this year ― it’s usually a sign to watch out.
And that’s exactly the case today…
Put another way, the likelihood of a recession hitting in the next 12 months is the highest it’s been in over 10 years.
And as central banks intervene to reverse the situation, it’s going to result in EXTREME volatility in the currency markets.
For anyone who knows how to “get in, make money, and get out” this will represent one of the greatest trading opportunities in history.
This is why I’ve spent the last six months developing a proprietary trading system, Alpha Currency Profits, to do exactly that.
Since its creation, Alpha Currency Profits has shown returns of 52% in two days, 75% in five days, 79% in four days, and even 100% in just four days.
And mind you, those are just the gains we’ve seen since early JUNE!
If you’re interested in seeing these kinds of returns, you can find out more about this unique trading system below… and the best part is, we’re trading currencies without touching the dangerous foreign exchange (FOREX) market!
Editor, Money & Crisis