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A guaranteed recession

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By Michael O’Connor

The bond market has shot back into focus in recent weeks.

For the last 40 years, it has been home to one of the most impressive bull runs in history.

The disinflationary period from the early 1980s saw the structural decline of interest rates. Bizarrely, US Treasury Bonds were offering 16% a year back in 1980, a far cry from the pennies on offer today.

Over the intervening years, continuous interest rate cuts were needed to facilitate GDP growth, but as rates approached zero, the central banks' weapon of choice ran out of ammo. Interest rates are now rising again as inflation persists.

The 10-year treasury has gone from a low of 0.5% in the summer of 2020 to 2.4% as of the end of March.

As the four-decade bull run comes to an end, what's next?

Is the negative correlation between equities and bonds, the cornerstone of a diversified portfolio, now officially dead?

Is a recession imminent?

Recession Rumours

If historical indicators are to be believed, then a recession is on the horizon. At the end of Q1, we saw multiple yield curve inversion, reigniting debates about an imminent recession.

Yield curve inversions between 2- and 10-year bonds have long been regarded as a solid indicator of a recession in the next 12 to 24 months.

In simple terms, a yield curve inversion occurs when the interest rate paid on short-term debt is higher than the interest rate paid on long-term debt of the same quality.

In a healthy economy, the yield curve should be upward sloping (longer-term rates higher than short-term rates). Logically this makes sense as investors seek higher returns as a reward for the greater uncertainty that comes with investing over longer periods.

When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor, and the yields offered by long-term fixed income will continue to fall.

But like everything, it's not quite that simple.

Since 1978 there have been six inversions of the yield curve.

While the above data shows yield curve inversions have accurately predicted recessions in the past, not all instances of yield curve inversions have resulted in recessions.

The 2- and 10-year yield curve has inverted 28 times since 1900, and in 22 of those instances, a recession has followed.

While an indicator that accurately predicts a recession over 75% of the time shouldn't be ignored, some material changes in recent years need to be considered.

Firstly, the Fed's manipulation of the yield curve has been well documented. I will stop short of saying this time is different, but the Feds intervention in the bond market over the prior decade suggests that a yield curve inversion may not be as valuable an indicator as it once was.

For example, we saw a yield curve inversion in August 2019, yet US stocks are up almost 70% since then. A switch to cash over this period would have meant missing out on the fastest bull run in history.

Another issue with inferring asset allocation decisions following a yield curve inversion is, even with this predictive information to hand, the alternative investment options are not as obvious as you might think. At least not across traditional asset classes.

While US stock returns for the one-year period following a yield curve inversion are lower (4.7% vs. 9.0% during all other one-year periods), the data also suggests that US Treasury Bonds will underperform US stocks over this period.

A paper from Eugene Fama and Kenneth French concluded:

"We find no evidence that inverted yield curves predict stocks will underperform Treasury bills for forecast periods of one, two, three and five years"

So, while recent data may suggest that equity markets will experience slowing growth, switching to bonds or cash is not the answer.

Stay the course.

"Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves" - Peter Lynch.

To learn how to protect your portfolio in a recession, go to theislandinvestor.com.

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Volunteers wanted for street collection

By Michelle Crean October is Breast Cancer Awareness Month and local volunteers are keen to not only raise awareness but also funds. Kathrina Breen, Eleanor O’Doherty and Kathleen O’Shea who […]

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By Michelle Crean

October is Breast Cancer Awareness Month and local volunteers are keen to not only raise awareness but also funds.

Kathrina Breen, Eleanor O’Doherty and Kathleen O’Shea who have been supporting the Irish Cancer Society for many years are delighted to be able to get back to their Pink Ribbon street collection in Killarney town next Friday (October 7).

They are the only group in the country doing the collection as many fundraisers have moved online since the pandemic struck.

“We’re the only town in Ireland doing it this year,” Kathrina, who feels it’s important to keep a street collection going, told the Killarney Advertiser.

“We haven’t done it in two years since before COVID. I pushed to do it as it raises a lot of money. People have been supporting this for years, this money goes towards breast detection equipment, information leaflets in doctors surgeries and towards cancer grants.”

In 2021, donations helped 254 breast cancer patients with free transport to and from 2,380 chemotherapy appointments by volunteer drivers, 154 patients received 514 nights of end-of-life care from Night Nurses and 3,430 enquiries were made about breast cancer through the Freephone Support Line 1800 200 700 and at 13 Daffodil Centres across the country.

And she added that they’re looking for a few volunteers to help out on the day.

“If anyone would like to help they can contact me on 087 2612992.”

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Calls for Council to acquire vacant Rock Road properties

By Sean Moriarty There are calls to make two vacant properties on Rock Road available to Kerry County Council’s housing inventory. The two cottages, one either side of the entrance […]

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By Sean Moriarty

There are calls to make two vacant properties on Rock Road available to Kerry County Council’s housing inventory.

The two cottages, one either side of the entrance to St Finan’s Hospital, are vacant for some time.
Cllr Maura Healy-Rae raised the issue at a recent Killarney Municipal District meeting.

“Regarding two vacant houses at the entrance to St Finan’s on Rock Road which appear to be vacant for a significant period of time. One of the properties is in the ownership of the HSE. I requested that Kerry County Council would liaise with the HSE with a view to potentially acquiring this house,” she told the Killarney Advertiser after the meeting.

“I stressed that it is important that the local authority exhaust all possibilities when it comes to providing more houses, particularly properties located within the town of Killarney where the need and demand for housing is critical.”

Kerry County Council said it would get the Vacant Homes Officer to contact the owner of the privately owned bungalow.

“They will inform the property owner that there is funding available under various schemes and grants to aid the return of this property to habitable use. Such schemes include the Repair and Lease Scheme and the recently launched Croí Cónaithe vacant property grant,” said a Council official.

Cllr Healy-Rae added: “I requested that KCC would liaise with the HSE with a view to potentially acquiring this house.”

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