Why Inverted Yield Curves Aren’t Always Fatal…
It seems like there’s an overwhelming amount of topics traders and investors could talk about nowadays…
We’ve seen everything from U.S. inflation hitting a 40-year high by jumping almost 8% in the past year and Russia invading Ukraine in late February to the Federal Reserve discussing how it wants to reduce its trillions in bond holdings.
This doesn’t even touch on the fact that the Fed approved its first interest rate hike in more than three years last March and that its most dovish member is now hawkish when it comes to rates and winding down the central bank’s balance sheet. This means inflation won’t be going anywhere anytime soon.
Then there is the yield curve, as if all of these things weren’t already ruffling everyone’s feathers…
The curve is a line on a graph that plots and measures the yield of different durations or time periods of bonds. In an ideal scenario, the line should curve upward as yields increase the longer the bond term is. That means longer-term bonds, like the 10-year Treasury note, should yield higher than the two-year bond.
An inverted yield curve is when longer-term debt drops below yields on short-term debt of the same credit quality.
The yield on the five-year Treasury note rose to 2.56% on Monday, March 28, while the 30-year yield fell to 2.55% — that means the yield curve on this spread was inverted for the first time since 2006, just a few years before the Global Financial Crisis.
The two- and 10-year Treasury yields also inverted on Thursday, March 31, for the first time since 2019. It’s important to note because this tends to be the most-watched spread amid economists. It ended up inverting one more time a day later, but don’t worry. The spread reverted back to what is considered normal both times.
In the past, these kinds of distortions in the bond market have proven to be a relatively reliable indicator of pending U.S. economic recessions. So it is important that we keep an eye on black swan events like this.
But what most people fail to understand is that an inversion in the yield curve doesn’t actually trigger a recession…
Even though it might signal that a recession is coming, it won’t tell you when. It just means that some investors are worried about the economy’s long-term outlook. On average, it takes about 18 months for things to materialize before deciding to turn south or not.
So there is no reason for us to be anxious because we’re still far from an official bear market. And despite the number of economists waving the “R” word around, I want you to understand that we’re not in the midst of a recession.
I don’t expect we’ll need to take any of this into account within the foreseeable future. But it does make sense for us to have a more conservative strategy and planned approach.
Even in a bear market, we will still find income opportunities like this week’s recommendation — American Airlines Group Inc. (AAL).
As the name suggests, it’s a U.S.-based airline company headquartered in Fort Worth, Texas. It’s the world’s largest airline when it comes to fleet size, scheduled passengers carried and even revenue passenger mile.
In fact, the airliner is such a big deal that Paramount Pictures based the movie “Up In the Air” around it in 2009. It stars George Clooney, whose character is trying to reach the American Airlines Consecutive Status by flying 10 million miles. It’s unfortunate that Hollywood made this club up for the movie, but the airline does offer neat perks like a dedicated phone number with 24/7 support and priority boarding through its Concierge Key status.
Many industries were hit hard by the pandemic, but few were more impacted than air travel. Due to things like travel restrictions and increased fears of catching COVID-19, most airliners had a rough time filling up seats the first several months of the outbreak. So, there’s no sugarcoating the fact that the air industry became a virtual standstill at the end of March 2020…
But now, there seems to be a lot of pent-up demand…
Russia’s invasion of Ukraine inflated oil prices to over $110 per barrel for the first time in about a decade. So jet fuel prices also recently hit their highest levels since 2008… and we all know what higher jet fuel prices do to airfares.
Except, travelers don’t seem to be complaining about it…
People are more than ready to get back to run-of-the-mill things, even if they have to pay an extra fee. We’re desperate to return back to “normal.”
At least, that’s what airliners are hoping for and they plan to pass the rising jet fuel costs onto the public.
But this also suggests that American Airlines could end up beating its revenue estimate of $8.46 billion for Q1 2022 — that would more than double the company’s revenue from exactly one year ago.
I don’t believe that’s too far of a stretch considering the fact that AAL just bounced off its March lows.
Shares opened at the $18.35 level on Tuesday, trading more than 40% higher than they were on March 7. However, the airliner is estimated to report first-quarter earnings on April 28, so we’ll have to wait about two more weeks to see what happens.
But if we combine this with the fact that people are getting excited about the social interactions they’ve planned this spring, we should be able to expect even greater things from AAL and other airline stocks in the future.
This is a long-term opportunity, but I am recommending a short-term trade of six weeks using covered calls to benefit from recent market volatility.
Generating income from covered calls can act like gasoline on a fire when stocks are climbing.
Please don’t get bogged down in the fact that this is an options strategy. Like I mentioned, this is one of the most basic techniques out there. And in Maximum Income, I provide readers with a step-by-step guide on exactly how to execute each trade in order to generate extra income from the stocks that may currently be sitting idle in your portfolio.
If you want to learn exactly how to get your portfolio working harder for you, then I highly recommend trying a covered call strategy. And if you want a little help on getting started, check out my special presentation, which explains how to use this technique to receive monthly income on the stocks you own. You can view the presentation here.