MOVE Creator Says Yield Curve Inversion Will End `in Tears'
MOVE Creator Says Yield Curve Inversion Will End `in Tears'
(Bloomberg) -- The inventor of one of the most widely followed indicators of the U.S. Treasury market says the inversion of a little-watched interest rate curve signals a disturbance in the markets ahead.
A move by the five-year, five-year swap rate below the Fed funds rate is a signal to shift into long convexity trades, which would pay off in the event of a large fluctuation in interest rates, according to Harley Bassman, who invented the Merrill Option Volatility Estimate Index while working at Merrill Lynch & Co. in the early 1990s.
“It’s never different this time,” he wrote in a blog postdated May 30. “I don’t know how or when it will resolve, but the yield curve has inverted in a half-dozen places, and eventually this ends in tears.”
Different flavors of the U.S. yield curve have inverted this year, a phenomenon often viewed by markets as a recession indicator because inversions have proven to be relatively reliable predictors of downturns in the past. Which yield curve to follow is a matter of some debate on Wall Street.
“Let’s keep our heads clear, it is not time to panic,” Bassman said in his note.
Bassman said he is covering short positions in out-of-the-money options and buying calls on the S&P 500 that would pay off if the trade war is resolved. He said he is also making leveraged bets on mid-grade credit, mortgage-backed securities, closed-end municipal bond funds and mortgage REITs on conviction the Federal Reserve will cut borrowing costs.
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