The Yield Curve Is Getting Flatter


The stock market endured a mini tantrum on Tuesday in response to a rise in bond yields. The Wall Street Journal described the 10-year Treasury note’s yield as experiencing its largest one-day increase since March 2017. The rise was big enough to cause the benchmark note to end the day with its highest yield in nearly seven years. Even before rising further yesterday and today, the yield hit a level not seen since the summer of 2011.chart

In addition to daily moves in the 10-year Treasury note, many financial market observers are eyeing the yield curve. The yield curve is a plot of the yields for Treasury securities of varying maturity. Under completely normal conditions, the yield curve would be rising upward with lower yields for shorter-term securities and higher yields for longer-term securities. This makes sense because the longer an investor has to wait to get their money back, the more compensation they are going to demand. Inflation isn’t much of a risk over 90 days, but it is a risk over periods of, say, five, 10 or 30 years.

Typically, this is how bond market participants think. They’re comfortable with getting lower interest rates on bills and notes with shorter periods to maturity and demand higher interest rates on bonds with longer periods to maturity. Occasionally, sentiment changes and the bond curve either flattens or inverts. When there is even a perception of this phenomenon occurring, heads turn.

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AAII Model Portfolio Update

No changes were made to the Model Shadow Stock Portfolio this month. The next quarterly review will take place at the end of May. Four stocks currently held in the portfolio qualified for purchase as of the end of April: Delta Apparel Inc. (DLA), Olympic Steel Inc. (ZEUS), Seneca Foods Corp. (SENEA) and Strattec Security Corp. (STRT).

The Model Shadow Stock Portfolio, which is a real-money portfolio of micro-cap value stocks, lost 1.85% in April. The Vanguard Small Cap Index fund (NAESX) added 0.33% for the month and the DFA U.S. Micro Cap fund (DFSCX) gained 0.82% in April.

Since its inception in 1993, the AAII Model Shadow Stock Portfolio has a compound annual average return of 15.2% versus the Vanguard 500 Index fund’s (VFINX) gain of 9.4% per year. Over the same period, the NAESX has posted an average annual gain of 10.2%.

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Highlights from this month’s AAII Journal

AAII Sentiment Survey

The percentage of individual investors expressing pessimism about their short-term outlook for stocks is at its second-lowest level of the year. More about this week’s results.

This week’s results:
  • Bullish: 36.7%, up 3.2 points
  • Neutral: 42.7%, up 1.8 points
  • Bearish: 20.6%, down 5.0 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.

What’s Trending on AAII

The Week Ahead

Many more retailers will report during what should be the last busy week of first-quarter earnings season. In total, we should see announcements from 24 S&P 500 companies, including TJX Companies Inc. (TJX) and Intuit Inc. (INTU) on Tuesday; Target Corp. (TGT) and Lowe’s Companies Inc. (LOW) on Wednesday; and Medtronic PLC (MDT) and Ross Stores Inc. (ROST) on Thursday.

The week’s first economic reports will be the May flash composite Purchasing Managers’ Index (PMI), April new home sales and the minutes from the May Federal Open Market Committee (FOMC) meeting, all of which will be released on Wednesday. April existing home sales will be released on Thursday. Friday will feature the University of Michigan’s final May consumer sentiment survey and April durable goods orders.

Six Federal Reserve officials will make public appearances: Atlanta president Raphael Bostic, Philadelphia president Patrick Harker and Minneapolis president Neel Kashkari on Monday; New York president William Dudley and Philadelphia president Patrick Harker on Thursday; and Chicago president Charles Evans, Dallas president Robert Kaplan and Atlanta president Raphael Bostic on Friday.

The Treasury Department will auction $33 billion of two-year notes on Tuesday, $16 billion of two-year floating rate notes (FRN) and $36 billion of five-year notes on Wednesday and $30 billion of seven-year notes on Thursday.

Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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