The Inversion Nobody is Talking About

September 3, 2019 | Category: Summit Sounds Off

By Nathan Bennett

You have likely heard about the “Inverted Yield Curve” that occurred in the Treasury Bond markets recently. The media has been shrieking about it incessantly, given that this signal has preceded every recession over the last 50 years.  According to the talking heads, recession must be imminent, and the end is nigh… or something to that effect. Nothing sells like bad news! 

However, a far more unique “inversion” occurred in the last few days.  For only the second time in 40 years, the yield on a 30-Year U.S. Treasury Bond fell below the Dividend Yield on the S&P 500! That’s right, last week, buyers of Treasuries purchased a 30-year bond paying less than the dividends alone from the 500 largest public American companies.  The last time this happened? March of 2009 as the stock market found bottom after the Great Recession 1.  

Why you should care

If you lend your money to the US Government by purchasing a 30-Year Treasury Bond and hold it to maturity, you are signing up for a return of less than 2 percent over a 30-year retirement lifespan. That is a long time to receive a return that might barely match inflation 2.

On the other hand, if you invest in the companies of the S&P 500, you receive almost 2 percent annually in dividends, and you stand to participate in any price appreciation of those companies over a 30-year span. While history cannot predict the future, $10,000 invested in the S&P 500 30 years ago is worth over $83,000 today 3. And that supposes you spent those annual dividends.  If you reinvested the dividends, that value would be over $152,000 4.  That 30-Year Treasury paying 2 percent?  It would only result in about $18,000 if held to maturity!

But what about the inverted yield curve predicting recession? 

While some pundits like former Fed Chair Janet Yellen are on record saying the formerly reliable signal might be a false alarm this time 5, we don’t think a long-term investor should really care. Recessions occur about every 6 years in the post WWII era. They are never fun, but they have always been temporary, with an average duration of just under a year 6. Markets often react negatively even before recession officially begins, and recovery often occurs before the data starts to improve. Timing them is impossible (sorry to keep reminding you of that 😊). 

But when you can match the return of “safe” Treasuries by merely accepting the dividends on the S&P 500 without needing to rely on any price appreciation, it feels a lot easier to stick with your stocks! Over 30 years it would be hard to believe that the engine of capitalism as driven by the publicly traded US companies in the S&P 500 wouldn’t win this comparison in a landslide. Fear not the inevitable recessions, and elect to keep participating in the earnings and profits of great companies as reflected by their dividends and stock price. 


1 – Stock dividends yielding more than 30 Yr Bond – Kate Rooney

2 – using CPI data from July 1989 – July 2019, inflation averaged 2.45%

3 YCharts growth of $10,000 from 8/31/89 to 8/31/19

4 Don’t Quit Your Day Job – SP500 dividend reinvestment calculator using Schiller Data

5 Fox Business News Interview – Janet Yellen, 8/14/2019

6 National Bureau of Economic Research – US Business Cycle Expansions and Contractions

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results.  This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security.  Past performance is no guarantee of future results.  Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.​

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