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‘I think the yield curve linkage is wrong’

'I think the yield curve linkage is wrong'


‘I think the yield curve linkage is wrong’


As U.S. bond yields continued to sink on Tuesday, CNBC’s Jim Cramer reiterated what he thinks about a measure that many economists consider to be a reliable recession indicator: “I think the yield curve linkage is wrong.”

The major stock indexes all slid as much as 0.47% as the 30-year Treasury bond yield fell under the S&P 500’s dividend yield for the first time in more than a decade. The last time that happened was in March 2009 in the middle of the Great Recession, CNBC reported.

“Until we get some tangible signs that the economy’s picking up, you’re going to have to get used to the screams of this needy bear cub of a market,” the “Mad Money” host said. “But I have to urge you to stay the course because … I do think the linkage will be exposed as faulty and stocks will remain the best investments.”

Cramer isn’t convinced that the yield curve inversion, where the 2-year bond pays out more than that of the 10-year bond, which has preceded each recession of the past 50 years, is flagging this time that a severe economic slowdown is in the works. His reasoning is based on the fact that U.S. bonds are yielding more than foreign bonds, which is drawing overseas demand for American bonds.

Bond yields fall as prices go up. Most U.K. Government Bonds are yielding about 0.50% or less while German Government Bonds are in the negatives.

“All that foreign … buying has created an inverted yield curve, where short-term rates are higher than long-term ones,” Cramer said.

He went on to argue that lower interest rates should help consumers borrow money more cheaply. Lenders tend to use the 10-year yield as a benchmark for car loans and mortgage rates.

“I think this will be a huge boon, especially to housing,” Cramer said.

The inverted yield curve, however, is bad for managed care stocks like Humana, he added. The company’s shares fell nearly 6% on Tuesday.

A recession would put President Donald Trump’s reelection prospects in danger, which would make way for Democratic hopefuls Bernie Sanders and Elizabeth Warren to win the White House, the host said. The two U.S. senators are advocating for a single-payer health care system that would upend the industry. If former Vice President Joe Biden were to be the nominee and ascend to the presidency, however, Obamacare is more likely to remain in place.

One thing that many bearish investors think can end the bleeding on the market is if the U.S. strikes a trade deal with China, but Cramer said there’s no hope of that happening in the near future.

“For now, Trump appears to have the upper hand … and we know the Chinese are struggling, so he’s got no incentive to deal,” he said.

WATCH: Cramer explains why he thinks the bond market is not signaling a recession

Questions for Cramer?
Call Cramer: 1-800-743-CNBC

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