With the yield curve still about as steep as it’s ever been, this graph from EconomicPic, based on data from World Beta, is pretty interesting:
(Click to enlarge)
With the record spread between two- and ten-years Treasuries still steepening we’re fully in ‘gold bar’ territory in the graph above. (I make the current spread just under 2.8%).
Their data would suggest holding REITs and stocks (S&P 500 and EAFE above) and avoiding gold (as if there’s not enough reasons) and commodities (GSCI, in chart above).
(I’m ignoring bonds because I’m not clever enough to know how to play the yield curve efficiently as a private investor. I’d rather invest in an asset where I can try to buy strong ongoing returns).
EconomicPic cautions on REITs:
Surprising (to me) is not the outperformance of REITs during periods in which the yield curve is steep (steep yield curves are good for banks, which means in normal times they are more willing to lend [this time may be different warning])
Will it be different? To a self-proclaimed contrarian like me, banks starting to lend again in the next 12-24 months seems great for REITs?
You might also want to read When the Punchbowl Disappears from Investors Chronicle on Friday, and Jonathan Davis arguing in today’s FT that the 30-year bull run in gilts is over:
It is true that the anomaly of bonds outperforming equities over long periods has reversed after last year’s equity market revival, but it remains the case, the professors note, that “in an apparent violation of the law of risk and return”, bonds have “produced equity-like performance, with annualised returns just a little below those on stocks, yet at much lower volatility”. Extrapolating these high returns in the future would, they conclude, “be fantasy”.
(Source: EconomicPic / World Beta)
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