The Rising Influence of Rising Affluence

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Contrarian view... J.P. Morgan's Kolanovic is skeptical of yield curve inversion, likes biotech and tech stocks

https://seekingalpha.com/news/3815896-jp-morgans-kolanovic-skeptical-of-yield-curve-inversion-likes-biotech-and-tech-stocks

The gap between the 2-year Treasury yield (NASDAQ:SHY) and the 10-year Treasury yield (NYSEARCA:TBT) (NASDAQ:TLT) is below 20 basis points for the first time this cycle, but likely won't turn negative in 2022, J.P. Morgan strategist Marko Kolanovic says.

Investors are concerned with an "ominous signal about the longevity of this cycle, i.e. the inversion of the 5s10s curve in the US following the FOMC meeting," Kolanovic wrote in a note. "In our view, it is the 2s10s that investors should watch. Historically, the 5s10s has inverted more frequently than the 2s10s and has given many more false signals (e.g. various inversion in early 1970s, 1984 and 1994) while the 2s10s has been much more reliable."

"One way of seeing this is to separate episodes of 5s10s inversion in two groups, i.e. those happening with 2s10s inversion and those happening without," he said. "Quite interestingly, two conclusions emerge. First, the 12m following inversion are usually good for risk markets regardless of whether the 2s10s inverted or not. Second, the 2nd year following inversion is usually challenging only when the 2s10s inverted originally."

"We think the 2s10s should stay positive in 2022 but even if it falls in the year, the evidence suggests risk markets should start to feel some headwind only from late 2023."