Yield curve & capital allocation

The yield curve is the ultimate market gauge of the economic cycle. Typically short term government yields are supposed to offer a return that compensate investors for the risk of inflation while long term yields are supposed to compensate for the risk of economic growth and inflation. The yield curve reflects long bond yield minus short term yield which typically reflects real growth and how real growth evolves in a cyclical way. In turn, this helps investors determine where to put their money. Asset behaviours change across the cycle. Equities do well at the bottom of a recession and into the recovery. They do badly when inflation starts outpacing growth (eg 2022). Bonds are defensive assets by nature and do well in recession. Commodities are generally doing badly during recessions and well when the economy overheats. Gold performs well in periods of negative real interest rates (like now).

Oct 2024

Sep 2024

August 2024