September to November ’22 brought a rapid spike in interest rates. This translated into higher yields and lower prices on DCF income payments- higher yields than we have seen in over a decade.

For the wise advisors who saw this opportunity (or those who heard me yelling it from the rooftops) it’s been a wonderful time to get clients into safe and secure higher yield fixed income.

Now it appears that the Fed is moving away from continued rate increases, and recession is more in the news. It’s a long way from here to any Fed rate cuts to stimulate a recessionary economy, but the interest rate market is already forecasting this, and rates are moving lower.

What Goes Up Must Come Down

Yields on short term assets remain higher than long term, but yields on both short and long term Treasuries are dropping fast, and we remain in a prolonged period of yield curve inversion.

In the last 4 weeks, long-term interest rates cratered. On March 2, the closely- watched 10 year Treasury yield was 4.07%, and today (4/6/2023) it is 3.28%.

Short term rates are also dropping fast. On March 7th, the 2 year Treasury hit 5.07%, but today it is 3.82%.

The St Louis Fed has a very useful chart showing this inversion- Click the image below to view the live chart itself.

 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

This inversion of the yield curve has moderated since the March 7th 2023 low point, but it is still persistent and is a closely watched marker for recession.

What does it mean?

For investors in DCF Income Payments, the highest rates available in over a decade may now be behind us. But with economic turmoil ahead and recession building, it’s still a great move to lock in the highest yield you can find.

For those considering short term assets like fixed annuities or CD’s, be aware of what’s known as a ‘renewal rate risk’. For a little while longer you might find 4-5% yield on 1-3 year assets, but after 3 years, what are your options? We may be back in a 2-3% yield environment, like we were this time last year.

Instead, the smart money is on the long term right now- for now, you can still lock in 5%+ on long term income with DCF Income Payments. But the interest rate market is falling, making yields lower and prices higher, and the news is pointing to recession. In recessions, the Fed typically cuts overnight rates to stimulate the economy… which will push yields lower still, and prices higher.

The Bottom Line:

Get in while you can before rates fall more and prices go up.

For more info on the inverted yield curve and the relationship to recessions, see this Recent Forbes Article that summarized the situation well:

“If you lock your money up for a longer period of time, you almost always get a higher interest rate,” Duke University finance professor Campbell Harvey told ABC News. “However, today, things are backwards – 10-year interest rates are far below short-term rates. This is known as an ‘inverted yield curve.’ In the past 50 years, we have seen seven inverted interest rate curves. Each one was followed by a recession.”

In 1986, Harvey published a dissertation that linked inverted yield curves to recessions after closely studying four major economic downturns from the 1960s to the 1980s. All nine recessions since 1955 have been preceded by an inverted yield curve according to research from the San Francisco Fed—except in one case. The time between an inverted yield curve and a recession has ranged from six to 24 months. As soon as the yield curve begins to invert, economists and investors begin to turn their heads.