Good Morning on this fine Tuesday,

It’s a game of push and pull in the equity markets, which is driving the bond market. Just to make the point, yesterday the Dow started on the plus side and by end of the day, had a 900 point swing and closed down 245. That would be the definition of volatility. Today we are seeing some of the same. The Dow started off + 275 and is now +175. Mortgage bonds are off a smidge at -9bps and the 10-yr is at 3.10. October has not been a bad month for bonds and here we are at the end of it with a few days left for funds to rebalance. During most months where equities are increasing we see some month end rebalancing/buying in bonds. Should we expect the reverse this month as bonds have been improving all month and equities have been falling? We may be seeing that right now with stocks up today. We’ll have a better idea on market direction at the close of trading and then again when we open tomorrow (ADP employment data is out early tomorrow). Keep in mind the rest of the week will be busy with data ending with Friday’s jobs report. For now, I would continue to expect higher than normal volatility.

Speaking about an inverted yield curve, interesting and a bit technical commentary from Bloomberg today worth sharing… Investors continue to ignore the flattening yield curve at their peril, according to Guggenheim Partners. Despite robust economic growth in the third quarter, the $265 billion investment firms view that the next U.S. recession will begin in early 2020 remains intact, strategists including global chief investment officer Scott Minerd wrote in a note to clients. The yield curve — an inversion of which has preceded past economic downturns — is a powerful signal, they said. While there is little risk of downturn in the near term, more restrictive monetary policy will overtake an overheating economy, they wrote. Despite prevailing sentiment to the contrary, the flattening yield curve remains a powerful indicator of coming recession. The prominent argument that quantitative easing has caused the curve to be unduly flat has several flaws, according to Guggenheim. It fails to recognize that net Treasury issuance, post-crisis regulatory changes and foreign exchange reserve intervention have acted in the opposite direction — steepening the curve, they argued. The benchmark 10-year Treasury yield has climbed about 70 basis points to 3.10 percent this year, while that on the 2-year equivalent is up 95 basis points to 2.83 percent. The gap between the two shrunk to an 11-year low of 19 basis points on Aug. 24 before rebounding to about 27 basis points Tuesday. Why is an inverted yield curve (where rates on shorter term bonds are higher than on longer term bonds) problematic? When a yield curve inverts, it’s because investors have little confidence in the near-term economy. They are demanding more yield for a short-term investment than for a long-term one. They would prefer to buy long-term bonds and tie up their money for 10 years even though they receive lower yields. They would only do this if they think the economy is getting worse in the near-term.

Enough for now, make today great!