Stock Bets Beat `Coin Toss' After Yield Inversion: Researcher

(Bloomberg) -- Common wisdom dictates that yield-curve inversions, like the one that hit U.S. rates in May, are among the surest early indicators of a coming recession. Researchers at Dimensional Fund Advisors say history tells a different story, at least for stock investors.

“We didn’t see much reliable evidence that yield-curve inversions were indications you should get out of equities,” said Marlena Lee, co-head of research at Dimensional, an Austin, Texas-based asset manager that oversees $576 billion. “About 70% of them were followed by positive equity returns. Much better than a coin toss.”

Yields on U.S. 3-month Treasury bills exceeded the 10-year note by a margin last seen in 2007, sounding what many analysts consider the loudest recession warning since before the financial crisis. Rates in Germany, Britain and Canada also flattened as investors sought safe havens amid mounting global trade tensions.

Dimensional looked at stock performance in the aftermath of 15 yield-curve inversions in Australia, Germany, Japan, the U.K. and U.S. dating back to 1985. In the U.S., which had three inversions between 1989 and 2006, returns were positive two times at the one-year mark and once after three years, according to a Dimensional research report in August. Looking at the broader group of nations, equities had positive returns 86% of the time 12 months after an inversion and 71% of the time after 36 months.

“The challenge with studying yield-curve inversions is there just aren’t many of them,” Lee said. “So you run into a small sample problem. We tried to alleviate it by looking globally.”

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Dan Reichl, Virginia Van Natta

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