Hello, YieldAlley readers! In this issue:

🧠 Do Simple Stock-Picking Formulas Still Work? (Larry Swedroe)

⚠️ Risky Business (Humble Dollar)

🥨 Warren Buffett’s public Kraft Heinz criticism is extremely unusual (CNBC)

📱 How to Watch Apple’s iPhone 17 Announcement—and What to Expect (Wired)

A Short History of the S&P 500 (A Wealth of Common Sense)

When analyzing fixed income markets and broader economic conditions, few indicators carry as much weight as the shape of the yield curve. The relationship between short-term and long-term interest rates provides crucial insights into market expectations, economic health, and potential investment opportunities. Rather than treating yield curve analysis as an abstract economic concept, investors can develop a systematic framework for interpreting these signals and adjusting their strategies accordingly.

At its core, the yield curve represents the fundamental principle that investors typically demand higher compensation for lending money over longer periods. This premium compensates for increased uncertainty, inflation risk, and the opportunity cost of tying up capital. Under normal circumstances, a 10-year bond should yield more than a 2-year bond, which should yield more than a 3-month Treasury bill.

However, markets don't always follow textbook principles. When economic expectations shift dramatically, the yield curve can flatten or even invert, creating situations where short-term rates exceed long-term rates. These inversions, while relatively rare, have historically served as reliable recession predictors and carry significant implications for investment strategy.

A normal, upward-sloping yield curve reflects a healthy economic environment where markets expect steady growth, controlled inflation, and stable monetary policy. In this environment, traditional bond strategies work as intended, with longer-duration bonds providing higher yields to compensate for increased risk exposure.

The steepness of a normal curve provides additional information about economic expectations. A steep curve often signals expectations of accelerating growth and potentially higher future inflation, while a less steep but still normal curve might indicate more moderate growth expectations. This nuance helps investors calibrate their duration and credit risk exposures accordingly.

For practical portfolio construction, normal yield curves create straightforward decision-making frameworks. Bond ladders function effectively, with each rung providing progressively higher yields. Bullet strategies targeting specific time horizons offer predictable returns, while barbell approaches can capture both the stability of short-term bonds and the yield advantage of longer maturities.

When short-term rates exceed long-term rates, markets are effectively predicting that current economic conditions are unsustainable and that central banks will be forced to cut rates aggressively to combat recession.

This creates a counterintuitive environment where holding cash or short-term bonds actually provides higher yields than longer-term investments. The inversion typically occurs because the Federal Reserve has raised short-term rates aggressively to combat inflation, while long-term rates remain anchored by expectations that this tightening will eventually slow the economy and force rate cuts.

The depth and duration of inversions matter significantly. Brief, shallow inversions may represent temporary market dislocations, while prolonged, deep inversions historically correlate strongly with recession risk. The current cycle has been notable for both its persistence and severity, marking the longest continuous inversion in over 60 years.

During normal curve environments, traditional strategies perform as expected, allowing investors to build ladders, implement barbell strategies, and generally follow textbook approaches to duration management.

With inverted curves, the standard recommendation to extend duration for higher yields becomes questionable when short-term instruments offer superior returns. Investors must weigh the immediate yield advantage of short-term bonds against the potential for capital appreciation in long-term bonds if and when the curve normalizes.

Moreover, inversions create timing considerations that don't exist in normal environments. If recession follows inversion as historically typical, long-term bonds may experience significant price appreciation as rates fall. However, the timing of this potential appreciation remains uncertain, creating a tension between current income and future capital gains.

The key is maintaining flexibility while respecting historical relationships. This might involve tactical adjustments to duration positioning during inversions while avoiding dramatic strategy overhauls based solely on curve shape. Diversification across maturity sectors can help capture opportunities regardless of curve direction.

Integration with other economic indicators enhances the framework's effectiveness. Employment data, inflation trends, corporate earnings, and global economic conditions all provide additional context for interpreting yield curve signals. No single indicator, regardless of its historical accuracy, should drive investment decisions in isolation.

Yield curves eventually normalize, but the path and timing remain unpredictable. The transition from inverted to normal typically occurs during or after recession, as central banks cut short-term rates to stimulate growth. This normalization process often presents opportunities for investors positioned appropriately.

Understanding normal versus inverted yield curves provides a valuable framework for interpreting economic conditions and adjusting investment strategies. Rather than treating yield curve analysis as a simple recession timing tool, investors can use it as one component of a comprehensive approach to fixed income investing. By understanding the economic logic behind different curve shapes while maintaining strategic flexibility, investors can enhance their decision-making without falling into the trap of over-relying on any single indicator.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

Major bank checking bonuses often require substantial deposits that many miss due to complex terms and high balance requirements. Citi is currently offering a tiered checking account promotion that provides up to $1,500 in cash bonuses for new customers willing to deposit significant funds. The mechanics are straightforward: open a new checking account, deposit new-to-Citibank funds, and maintain required balances for 90 days total. This transforms large cash positions into immediate returns by simply changing where you bank.

This offer delivers meaningful value for high-net-worth individuals who can meet the substantial deposit requirements. The effective returns are solid - 2.5% on $30,000 ($750 bonus) or 0.75% on $200,000 ($1,500 bonus) for a 90-day commitment. The bonus structure rewards larger deposits proportionally. For qualified individuals with significant liquid assets, this represents a risk-free return that significantly outpaces current savings rates, though the opportunity cost of tying up substantial funds should be considered against other investment options.