Inversion is back in the news. Treasury yields have been falling dramatically over the last week or so, with yield on the 10-Year Treasury Note falling to below 2.2% for the first time since the middle of 2017. Given that the Fed has raised short-term rates significantly since then, that has resulted in longer-term yields falling below those on short-term debt, giving an inverted yield curve. That is typically taken as a sign of upcoming economic weakness in the U.S. and even of an impending recession, but what does it mean for energy investors?
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The most obvious implications are bad. If the market is correct and we are heading towards recession in the U.S., that would have a significant effect on oil demand, pushing prices ever lower. That, in turn, will add to the downward pressure on oil stocks and energy stocks in general.
Nor is the broader picture looking good for oil prices. Yesterday’s tweet from President Trump announcing tariffs on Mexico has reinforced the view that he believes in the power of tariffs to advance a multitude of policy positions, even those not directly related to trade and economics. For a commodity such as oil, where global growth expectations play such an important role in pricing, that is a very bearish sign and will add to the pressure on energy stocks.
Even as all that happens, though, the very low yields on Treasuries and other fixed income securities may well put a floor on stocks of integrated,…
