Question

Asness documented a pattern in US stock market data in which T-bond yields are predictive of long-run market returns. What is the pattern? What explanation does he suggest for this pattern?

Answer 1

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Yield curve and Stock markets:

Normally people expect less interest rate for short term bills, then compared to long term bills.

Because there is a high-interest rate risk in the long term bills(10yr T Bill).

But during a recession, people expect more interest rate for short term bills, then compared to long term bills.

Because they perceive more risk in the short term (i.e due to recession) and expect high returns.

In such a situation,

The Investor perceives long term to be much safer than short term.

When the yield curve inverts it doesn't guarantee recession, it's can be a warning signal/symptom to a maybe upcoming threat in the stock markets.

Historically,

When both of them are equal, there is less than a 15% chance of recession.