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What 'reliable' recession indicators investors should be watching

With economic headwinds carrying the sail into the fourth quarter of 2023, many experts are left wondering how markets will perform following the Fed's interest rate pause and its open-ended option for one last rate hike this year.

In the bond market, the 10-year Treasury yield's (^TNX) current performance compared to 2007 has some sitting on edge, looking for signals of a recession. Opimas CEO Octavio Marenzi joins Yahoo Finance to discuss the increase in the Treasury yield curves and what investors should look at to indicate a recession.

In addition, Marenzi outlines several safer investments during these volatile times, stating investors should take advantage of the shorter end of the yield curve: "I can't remember a time when you could get 5% return for basically doing nothing and taking no risk at all."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

RACHELLE AKUFFO: As we look at the performance of the 10-year yield here, looking at some of the 2007 highs, it's been flashing recession signals. Is that the best signal to follow when you're trying to figure out what the markets are going to do going forward? Obviously you have the VIX currently above 18 as well, so a lot of volatility, and we're seeing this flight to safety in the 10-year.

OCTAVIO MARENZI: Well, I guess a very reliable indicator of whether we're going to see a recession coming is basically the inversion of the yield curve-- basically when short-term interest rates go above long-term ones, and we've seen that for some time now. Now, it has been said that the inversion of the yield curve has accurately forecast six of the seven last recessions or something of that sort, but it's a fairly firm indicator because so much is dependent on interest rates.

So as the Fed increases short-term interest rates, all sorts of industries that are dependent on that, knowingly or unknowingly, start to suffer. Real estate is the most obvious one. We saw the weak housing sales come in now as a result, I think, of higher mortgage rates, and those mortgage rates seem to be going higher and higher not very quickly, modestly-- at a moderate rate. That's going to put a damper on that. So I think that's a very, very good indicator of where we're going to go as you see that kind of inversion.

We've seen that inversion now for several months in terms of the yield curve. That's going to have a very negative effect on all sorts of different industries, in particular the banking industry. Their lending capacity is going to be constrained as a result of that, and that's going to reverberate through the economy. So I think that's a fairly reliable indicator. I'm actually somewhat surprised we haven't seen that impact the economy just yet, but I think that's still in the works. And it's been a very reliable indicator in the past of some-- of a recession to come. So I think that's really what's in the cards now as well.

AKIKO FUJITA: Octavio, from a strategy standpoint, what are the sectors that provide some protection in this uncertain environment?

OCTAVIO MARENZI: Well, look, I think very short-term, US treasuries are yielding over 5% now so you can buy all the way out to six month US treasuries and the yielding over 5%. And because they're so short-term, you don't really run any interest rate risk. For those people who back in 2022 thought a good place to park their money was in bonds and government bonds and long dated bonds, they got sorely disappointed as a result of basically the value of their bonds being eaten away by higher interest rates.

When you're at the very short end of things, that doesn't really matter. You're going to get the money back very, very quickly, so you're not as exposed to changes in interest rates. So I think the very short end of the yield curve, the one to six months, are looking really good. I can't remember a time when you could get 5% return for basically doing nothing and taking no risk at all. So I think that's a very attractive investment at the moment. I think we've been advising people to sit on the short end of the yield curve and wait there until things look better, until we can see a concerted move by the central banks to basically start to cut interest rates again.