Inverted Yield Curve: Don't Complain, Profit From It

03/28/2019 10:24 am EST


Paul Cretien

Retired Professor of Finance,

Paul Cretien suggested a profitable strategy based on the inverted yield curve. Here is how it worked out.

There has been a lot of discussion regarding the inverted yield curve and what it may mean for the economy and stock prices. An inverted yield curve is often a precursor of a recession.

So, we thought we would remind you that we pointed out that one measure of the bond curve initially inverted back in January as described in this article.

We weren’t trying to predict a recession, just pointing out the trend and way to profit from it.

On March 13 we pointed out that the underlying weakness suggested by the inversion could cause the Federal Reserve to pause or even reverse. The resulting lower interest rates (increase in near term interest rate instruments, the three-month Eurodollar futures in particular) may provide a profitable opportunity. This triggered the trades we suggested in January when we wrote: “buying short-term Eurodollar futures now may be profitable before the end of 2019.”

Below is a table illustrating the price movement in the 15 nearest term Eurodollar contracts.

Price Movement

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