Inverting Bond Yields: How to Trade Fear of a Recession


Fear was back in a big, big way in August 2019.

Markets were lower across the boards thanks to falling bond yields.

In fact, by late August 2019, the 10-year yield of 1.463% fell below the two-year’s yield of 1.51%.  That, of course, raised concerns about the health of the U.S. economy, and is seen as an indicator of potential recession.

Making things a bit worse, the yield on the 30-year was below 2% again to 1.906%, hitting a new record low.  That broke below its prior all-time low of 1.916% hit in early August 2019.  For the first time in 10 years, the S&P 500 dividend was yielding more than the 30-year bonds.

However, while things may appear bad, some analysts thought fears were overblown.

For example, MRB Partners believed recessionary fears may be overblown.

“The yield curve’s inversion this year is a symptom of external growth stress and powerful distortions in global bond yields and does not reflect restrictive Fed policy,” they said, as quoted by CNBC.  “Even if the inverted yield curve captures investor’s uncertainty about worsening global growth … a balanced perspective would still suggest that the odds of a recession in the next 12 months are no higher than 20%.”

Some deemed that to be wishful thinking, though.

With the trade war still raging on at the time, it was only making things worse.  So, the question becomes, how does the average investor keep their portfolio safe from volatility.

Three of the best ways to do just that include trading volatility itself with the following:

ProShares Ultra VIX Short-Term Futures ETF (UVXY)

As volatility ticks higher with the trade war, ETFs such as the UVXY could run even higher from a current low of $30 a share.  The ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index.

VelocityShares Daily 2x VIX Short-Term ETN (TVIX)

The TVIX is another great way to trade elevated volatility.  This ETF  tracks an index of futures contracts on the S&P 500 VIX Short-Term Futures Index. As volatility ticks higher, the TVIX ticks higher.

iPath S&P 500 VIX Short-Term Futures (VXX)

As volatility returns to the markets, one of the best ways to profit from volatility is with the VXX ETN, which provides exposure to the S&P 500 VIX Short-Term Futures Index Total Return.  In simple terms, as volatility shoots higher, so does the VXX.


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.