Plentiful Wealth is Growing + How to Read the Yield Curve

I have some exciting news!

Plentiful Wealth is growing. I've brought on a second advisor and now that the dust has settled, I'm excited to make the official announcement.?

Jay Hoffman is an experienced advisor and family friend who I've known for decades. Rather than retype his bio, I'll just quote it.

Jay Hoffman, Senior Vice President of Investments at Plentiful Wealth, is a seasoned professional with over two decades of experience in the realm of financial services. Jay joined the Plentiful Wealth team in 2023, bringing with him a wealth of knowledge and an expansive skillset.

Before he joined the financial industry, Jay built a successful career in the energy sector that spanned several decades. This diversified experience has given him a unique perspective, combining strategic insights from both industries that significantly enrich his current role.'

In his position at Plentiful Wealth, Jay leverages his expertise to devise effective investment strategies, demonstrating a steadfast commitment to helping clients realize their financial objectives. His ability to meld his extensive experience from both energy and financial sectors is what sets Jay apart, allowing him to provide a broad spectrum of advice to clients and colleagues alike. With his unique career journey and multi-disciplinary approach, Jay Hoffman continues to be a vital asset to Plentiful Wealth.

I'm excited to bring Jay onboard. It's been a pretty intense process over the last month, which is why I haven't been sending out as many updates. Now that things are settling and his clients have transferred, I can make the official announcement.?

Next, I want to take a few minutes and talk about the yield curve, what it's saying, and why it's important.?

The yield curve is a graph that plots the interest rates on debt for a range of maturities — it shows the yields of bonds with equal credit quality but differing maturity dates. It's usually referenced in terms of government bonds, as they are considered risk-free assets.

The yield curve can take two primary shapes:

Normal Yield Curve:?This is the most common shape for the yield curve. In a normal yield curve, longer maturity bond yields are higher than short-term bond yields. This shape shows that investors expect to be compensated more for taking on the added risk of holding bonds for a longer period, which includes risks like inflation and changes in interest rates.

Inverted Yield Curve:?An inverted yield curve happens when long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This is a rare scenario and is often seen as a predictor of economic recession.?

The yield curve tells us about the bond market's expectations for the future. A normal yield curve suggests that investors expect steady economic growth. An inverted yield curve, on the other hand, is often interpreted as a sign that investors expect sluggish growth or even a recession in the future.

Likewise, you can use the yield curve to price future interest rate expectations.

I'm going to oversimplify it a bit, but look at the current yield curve above. If you look at the 1 year rate, it's a bit over 5.2%. If you look at the 2 year rate, it's about 4.7%.?

What does this tell me? It tells me two things. First, the bond market is pricing in a rate cut somewhere past a year out. Second, the bond market is most likely pricing in a recession, due to that rate cut.?

Where do I get that? From applying a bit of basic algebra to the yield curve.

Think of the two year as the average of two one year bonds. Right now that average is 4.7% and the first one year bond is 5.2%. Working through to find the missing number, (4.7*2) - 5.2 = 4.2% implied interest for the second year.?

The bond market is pricing in a rate cut of ~1% in the next year.?

Why does this imply a recession? Simple, because cutting interest rates are the Fed's best weapon for stimulating the economy. If the economy does go into a recession, it's likely that the Fed will cut rates to steady the ship, so to speak.

It's important to note, though, that while the yield curve can be a useful tool, it's not a guaranteed predictor of economic outcomes. It's just one of many factors that investors and economists look at when trying to predict future economic activity.

If you don't want to worry about the yield curve, or just want a second opinion on your portfolio, let's chat.

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