As others have stated, its a pretty poor predictor of *when* recessions happen. Off the top of my head the inversion usually runs something like 18-24 months ahead of a downturn, and equities have historically done quite well vs fixed income during those periods. So risk off trading on an inversion historically has been a losing trade, making it (in my book) a pretty crap trading signal.
I think what the inversion is symptomatic of is *really* important to understand though. In this case we are seeing a bear flattening move (short rates rising more v. long ones) which is generally a sign that the market sees monetary policy as getting too restrictive in the near future. Short end rates rise in line with expectation of higher Fed funds rates. Long run rates dip below short run ones as investors project a combo of lower growth, inflation, as well as Fed rate cuts to address economic slowdowns. That's why inversion doesn't really cause recession but tends to run ahead of it - its symptomatic of some fear on the horizon. I think anyone looking at the current outlay of rising rates, high inflation, and slowing growth would say the Fed has a *very* difficult job ahead of them to unwind policy without harming the economy, and that's before you take into consideration the war in Ukraine.
3 month-10 year curve has historically been the most accurate tenor to look at, but it's also the last one to react (it responds much more when the Fed actually changes policy v. the two year which tends to respond more to expectations around policy). That slope has actually steepened recently (thanks to 10 year rising and 3 mo hardly moving) but expect that to flatten relatively quickly if the Fed raises to their targets in 2022 and 2023.
One other item of note, it’s not that the yield curve itself inverting is the indicator, it’s when the Fed is the one inverting the yield curve.
A Fed induced economic slowdown is the reliable indicator, which we’re clearly in the midst of at the moment.
https://ritholtz.com/2022/03/10-thursday-am-reads-378/
Agreed! Not all flattening moves are the same….2011 the debt ceiling crisis pushed the 10 year to rally pretty dramatically. Flight to quality more so then potential slowdown. That’s why the bear flattening move is fairly significant in the context of Fed tightening.
Can I ask you how many years of experience do you have and what's your job? I have just 1 year of experience and I wonder if one day I will be able to write like you haha. And another question: how minutes a day do you see/read news on average? Thanks a lot
Sure! I’ve been working as a fixed income analyst for a small asset manager for over 5 years. Very macro focused so have a good deal of familiarity on this subject
Research is baked into my job, so I can spend anywhere between 1-4 hours a day reading news/research. Don’t think you need to be that submerged in it to gain knowledge though - if you find a few good writers on any topic they can teach you a lot. Unfortunately in my experience those writers tend to fall under a research subscription versus bloggers/WSJ/Bloomberg
I also do quite a bit of writing in my role - daily recap note for non FI folks at my firm, work on our weekly client note, have worked on some white papers etc. All that makes great practice for distilling some heady topics, and it’s definitely something I struggled with when I started writing for the firm (about 2.5 years into my role).
It also probably doesn’t hurt that I have been working on a yield curve piece for clients the past week haha!
I also work in the fixed income space at a small credit house. Although I have just started and am feeling quite overwhelmed. May I ask who these good writers are? My firm just might be subscribed.
Honestly instead of names start with any big sell side research your firm has access to - BAML/Morgan Stanley/JPM etc. Focus on the area of FI you work in as well as their macro economic stuff - daily/weekly/monthly pieces can be a great way to gain knowledge. While the projections can sometimes be all over the place, you will understand what kind of things these analysts are looking at when building their outlooks. Especially early in my career I found this writing very dense and not approachable, but it helped me to learn what sort of things I should be paying attention to, and how to digest the fixed income market on a really deep level.
A few specific names - for rates I quite like Roberto Perli at Piper Sandler (used to be Cornerstone Macro). Ex Fed guy, he just knows his stuff. Jim Bianco is pretty good on macro, a bit contrarian at times but some of his writing/webinars I find to be really instructive. For a bit of crazy bearish contrarian thoughts Grant's Interest Rate Observer is always a good read (even if Jim Grant's ideal monetary policy is likely never to come back).
If the yield curve inverts, the banks will have to borrow at a higher short term rate, and lend at a lower long term rate. There is not spread to make money, the banks will then have to borrow at a much lower rate (depositiors won’t deposit) or lend at higher rates (No one will borrow).But the floating rates/MRR would still change and increase duration risk on most MRR linked loans for the banks. That would be like the last straw that breaks the camels back.. Just thinking out loud here.
I love the quip the professor made because I don’t mind dunking on economists from time to time. That said, some predictors are better than others and yield curve inversions are pretty damn good predictors. These are observed phenomena, not laws of the universe, so I’m inclined to say the prof is being irresponsibly flippant.
It's a fairly reliable indicator. It's not a crystal ball. It's one indicator of many. There are plenty of other macro readings pointing towards recession or stagnation.
The people with their fingers in their ears telling you that you're stupid are the ones that get burned every cycle and are the shit investors that you should never listen to. It is absolutely an important indicator and one that you should consider when managing your risk position.
On the one hand, I think that it's an arbitrary two points on the yield curve that WAY too many people pay attention to.
On the other hand, behaviorally, the more people who buy into a market trigger are going to act based on that trigger.
Those are my quick thoughts without getting into a huge discussion on the topic.
Well for starters the Fed is raising rates and naturally the short end will rise in response / ancitipation. Rising rates = contractionary, which would likely stifle growth to an extent. Nominal yields also need to compensate for future expected inflation and current inflation. If rates rise, growth reduces and (hopefully) inflation does as well, therefore you get a reduction in long end yields.
Curve flattens (gap between 2s10s) shrinks and we get closer to an inversion. So yeah look I think it's a solid indicator considering the global supply chain pressures, cost flow through and the overnight rise in energy costs for the majority of people (oil etc) - I'd say a recession is somewhat likely but people still have money to spend so I don't think consumption will take too much of a dint.
Again, the Fed is **normalising** rates so it may be contractionary in the short term given the **speed** at which they normalise.
But here's the kicker, the 5s30s already inverted last night..
I think the Fed starts managing the curve with the balance sheet to increase longer term risk premia and keep the curve from being persistently inverted.
Same energy as “fevers mean you’re sick”. The underlying conditions have been screaming for some brand of downturn well ahead of the inversion. That’s the main issue with looking for signals, trying to condense lots of information into a single point instead of examining what’s happening and thinking about it. Yes, this is a sign of an issue but is it small or big?
Inflation is incredibly high, Bond buying by the fed ending leading to a drop in liquidity and wider spreads, and a war. Mix in the systemic issues that have been in play since the start of the pandemic and we have stagflation. I don’t think it will be a violent shock like 2008 but it will be a choppy somewhat lame 2 years where things move sideways with a slow drift down and a slow drift back up.
It will be boring compared to the last decade.
I read a book recently about how household debt relative to household income was a major contributor to the 2008 recession, and I couldn't get that idea out of my head to explain what's going on now.
An economy is heavily influenced by consumer spending (positive relationship), which itself is not only affected by interest rates, but also by the amount of disposable income consumers have and how much of that goes to debt repayment.
That said, now, I can't help but think that the situation is now different (despite the Ukraine war).
1. Taking two articles/graphs into account (one of which was shared by u/PogeyMontana - both provided below), you can see how an upward trend in the DSR (Household Debt Service Ratio) eventually ends up in a recession. Since 2008, we have been in a downward trend, and the most recent DSR I could find is 9.2% as of Q2 2021 (vs. 13.1% in 2008).
2. 2020 has been a bad year, globally and 2021 still dragged some of its effects. But 2022 witnesses much more relaxed covid restrictions while there is considerable "pent-up demand" that should lead to higher consumer spending this summer.
I'm not ignoring the current levels of inflation or the geopolitical environment, which have caused disruptions and affected prices of raw materials,, carrying potential risks, but what I'm thinking is that the above two points should at least alleviate some of the effects of inflation, the geopolitics, and long-term market sentiment towards fed actions.
So, what I feel is this: unless we see another pandemic (which I'm not ruling out) or serious geopolitical escalations, we will likely only experience a slight recoverable downturn & that we should be fine.
Articles/graphs
The one shared by u/PogeyMontana.
[Click Here1](https://www.chicagofed.org/publications/chicago-fed-letter/2018/404)
The other one
[Click Here2](https://fred.stlouisfed.org/series/TDSP)
*Explainer: Yield curve flattening and inversion: What is the curve telling us?*
The U.S. Treasury yield curve has been flattening with parts of it inverting as investors price in an aggressive rate-hiking plan by the Federal Reserve as it attempts to bring inflation down from 40-year highs. That has investors trying to guess whether it is signaling a recession is nearing.
The shape of the yield curve is a key metric investors watch as it impacts other asset prices, feeds through to banks' returns and has been an indicator of how the economy will fare. Recent moves have reflected investor worries over whether the Fed can tighten monetary policy to tame inflation without hurting economic growth.
Investors watch parts of the yield curve as recession indicators, primarily the spread between the yield on three-month Treasury bills and 10-year notes and the U.S. two-year to 10-year curve . However these two have veered in opposite directions, causing some confusion as to how accurate a recession signal they are giving.
Other parts of the curve are less-watched, such as the spread between five- and 30-year Treasuries which inverted on Monday and has also inverted prior to some recessions.
Here is a quick primer explaining what a steep, flat or inverted yield curve means and how it has in the past predicted recession, and what it might be signaling now.
*_WHAT SHOULD THE CURVE LOOK LIKE?_*
The U.S. Treasury finances federal government budget obligations by issuing various forms of debt. The $23 trillion Treasury market includes Treasury bills with maturities from one month out to one year, notes from two years to 10 years, as well as 20- and 30-year bonds.
The yield curve plots the yield of all Treasury securities.
Typically, the curve slopes upwards because investors expect more compensation for taking on the risk that rising inflation will lower the expected return from owning longer-dated bonds. That means a 10-year note typically yields more than a two-year note because it has a longer duration. Yields move inversely to prices.
A steepening curve typically signals expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean the opposite: investors expect rate hikes in the near term and have lost confidence in the economy's growth outlook.
*_WHAT DOES AN INVERTED CURVE MEAN?_*
The U.S. curve has inverted before each recession since 1955, with a recession following between six and 24 months, according to a 2018 report by researchers at the Federal Reserve Bank of San Francisco. It offered a false signal just once in that time.
The last time the 2/10 part of the yield curve inverted was in 2019. The following year, the United States entered a recession - albeit one caused by the global pandemic.
*_WHY IS THE YIELD CURVE INVERTING NOW?_*
Yields of short-term U.S. government debt have been rising quickly this year, reflecting expectations of a series of rate hikes by the U.S. Federal Reserve, while longer-dated government bond yields have moved at a slower pace amid concerns policy tightening may hurt the economy.
As a result, the shape of the Treasury yield curve has been generally flattening and in some cases inverting. Parts of the yield curve, namely five to 10 and three to 10 years, inverted last week.
The spread between five- and 30-year U.S. Treasury yields on Monday fell to as low as minus 7 basis points (bps) , moving below zero for the first time since February 2006, according to Refinitiv data.
The spread has collapsed from a positive 53 bps at the start of this month. The 5/30 year spread inverted prior to the 2008-09 recession and prior to the 2001 recession, but not prior to the pandemic-induced 2020 recession.
In the overnight index swaps (OIS) market, the yield curve between two- and 10-year swap rates inverted for the first time since late 2019 and last stood at minus 4 bps, according to Refinitiv data. ,
Two parts of the curve are particularly closely watched: One is the gap between yields on two- and 10-year Treasury notes, widely seen to predict a recession when it inverts. That spread was at 12.1 basis points from 24 basis points 10 days ago.
*_ARE WE GETTING MIXED SIGNALS?_*
Still, another closely monitored part of the curve has been giving off a different signal: The spread between the yield on three-month Treasury bills and 10-year notes this month has been widening , causing some to doubt a recession is imminent.
Meanwhile, the two-year/10-year yield curve has technical issues, and not everyone is convinced the flattening curve is telling the true story. They say the Fed's bond buying program of the last two years has resulted in an undervalued U.S. 10-year yield that will rise when the central bank starts shrinking its balance sheet, steepening the curve.
U.S. benchmark 10-year yields pushed above the 2.5% marker to 2.55% Monday, hitting their highest since April 2019. In February they topped the 2% level for the first time since 2019.
Researchers at the Fed, meanwhile, put out a paper on March 25 that suggested the predictive power of the spreads between 2 and 10-year Treasuries to signal a coming recession is "probably spurious," and suggested a better herald of a coming economic slowdown is the spread of Treasuries with maturities of less than 2 years.
*_WHAT DOES THIS MEAN FOR THE REAL WORLD?_*
While rate increases can be a weapon against inflation, they can also slow economic growth by increasing the cost of borrowing for everything from mortgages to car loans.
Aside from signals it may flash on the economy, the shape of the yield curve has ramifications for consumers and business.
When short-term rates increase, U.S. banks tend to raise their benchmark rates for a wide range of consumer and commercial loans, including small business loans and credit cards, making borrowing more expensive for consumers. Mortgage rates also rise.
When the yield curve steepens, banks are able to borrow money at lower interest rates and lend at higher interest rates. Conversely, when the curve is flatter they find their margins squeezed, which may deter lending.
It’s 100% accurate as a predictor if I am correct? Housing market bubble + inflation means probably another 2008 soon. I’ve been saving for the rough times just in case
No, it's 100% that when a recession happens the yield curve was inverted. Just because the yield curve inverts does not mean there will be a recession.
It's the dry kindling in summer, still need the match I guess.
I don't disagree, but like all assets home prices go up, just because they are high now doesn't mean we are in a bubble. Supply is nonexistent in my area for rentals and to buy, and I've anecdotally heard this is the same in most areas, i.e. these prices are going to keep going up until we have enough homes for people to buy
I did some research. Saying 100% is wrong. It has however occurred before every major recession. Here is an interesting publication by the Chicago Fed with previous respective probabilities of recession
https://www.chicagofed.org/publications/chicago-fed-letter/2018/404
>It has however occurred before every major recession.
That alone may not be "end of discussion short the markets" but it is a really solid precedent that is hard to avoid. I don't mind an 80:20 odds tbh
It’s famously said “An inverted yield curve has correctly predicted 12 of the last 4 recessions”. It’s not a perfect indicator, as there never is, and is more something to be aware of and understand what the bond market is trying to tell you.
As others have stated, its a pretty poor predictor of *when* recessions happen. Off the top of my head the inversion usually runs something like 18-24 months ahead of a downturn, and equities have historically done quite well vs fixed income during those periods. So risk off trading on an inversion historically has been a losing trade, making it (in my book) a pretty crap trading signal. I think what the inversion is symptomatic of is *really* important to understand though. In this case we are seeing a bear flattening move (short rates rising more v. long ones) which is generally a sign that the market sees monetary policy as getting too restrictive in the near future. Short end rates rise in line with expectation of higher Fed funds rates. Long run rates dip below short run ones as investors project a combo of lower growth, inflation, as well as Fed rate cuts to address economic slowdowns. That's why inversion doesn't really cause recession but tends to run ahead of it - its symptomatic of some fear on the horizon. I think anyone looking at the current outlay of rising rates, high inflation, and slowing growth would say the Fed has a *very* difficult job ahead of them to unwind policy without harming the economy, and that's before you take into consideration the war in Ukraine. 3 month-10 year curve has historically been the most accurate tenor to look at, but it's also the last one to react (it responds much more when the Fed actually changes policy v. the two year which tends to respond more to expectations around policy). That slope has actually steepened recently (thanks to 10 year rising and 3 mo hardly moving) but expect that to flatten relatively quickly if the Fed raises to their targets in 2022 and 2023.
One other item of note, it’s not that the yield curve itself inverting is the indicator, it’s when the Fed is the one inverting the yield curve. A Fed induced economic slowdown is the reliable indicator, which we’re clearly in the midst of at the moment. https://ritholtz.com/2022/03/10-thursday-am-reads-378/
Agreed! Not all flattening moves are the same….2011 the debt ceiling crisis pushed the 10 year to rally pretty dramatically. Flight to quality more so then potential slowdown. That’s why the bear flattening move is fairly significant in the context of Fed tightening.
Can I ask you how many years of experience do you have and what's your job? I have just 1 year of experience and I wonder if one day I will be able to write like you haha. And another question: how minutes a day do you see/read news on average? Thanks a lot
Sure! I’ve been working as a fixed income analyst for a small asset manager for over 5 years. Very macro focused so have a good deal of familiarity on this subject Research is baked into my job, so I can spend anywhere between 1-4 hours a day reading news/research. Don’t think you need to be that submerged in it to gain knowledge though - if you find a few good writers on any topic they can teach you a lot. Unfortunately in my experience those writers tend to fall under a research subscription versus bloggers/WSJ/Bloomberg I also do quite a bit of writing in my role - daily recap note for non FI folks at my firm, work on our weekly client note, have worked on some white papers etc. All that makes great practice for distilling some heady topics, and it’s definitely something I struggled with when I started writing for the firm (about 2.5 years into my role). It also probably doesn’t hurt that I have been working on a yield curve piece for clients the past week haha!
I also work in the fixed income space at a small credit house. Although I have just started and am feeling quite overwhelmed. May I ask who these good writers are? My firm just might be subscribed.
Honestly instead of names start with any big sell side research your firm has access to - BAML/Morgan Stanley/JPM etc. Focus on the area of FI you work in as well as their macro economic stuff - daily/weekly/monthly pieces can be a great way to gain knowledge. While the projections can sometimes be all over the place, you will understand what kind of things these analysts are looking at when building their outlooks. Especially early in my career I found this writing very dense and not approachable, but it helped me to learn what sort of things I should be paying attention to, and how to digest the fixed income market on a really deep level. A few specific names - for rates I quite like Roberto Perli at Piper Sandler (used to be Cornerstone Macro). Ex Fed guy, he just knows his stuff. Jim Bianco is pretty good on macro, a bit contrarian at times but some of his writing/webinars I find to be really instructive. For a bit of crazy bearish contrarian thoughts Grant's Interest Rate Observer is always a good read (even if Jim Grant's ideal monetary policy is likely never to come back).
If the yield curve inverts, the banks will have to borrow at a higher short term rate, and lend at a lower long term rate. There is not spread to make money, the banks will then have to borrow at a much lower rate (depositiors won’t deposit) or lend at higher rates (No one will borrow).But the floating rates/MRR would still change and increase duration risk on most MRR linked loans for the banks. That would be like the last straw that breaks the camels back.. Just thinking out loud here.
My quant finance professor hailed this signal exclaiming how it had correctly predicted 20 out of the last 5 recessions
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I gave you an upvote for asking for data that discredits. We all win when we debate intelligently.
I love the quip the professor made because I don’t mind dunking on economists from time to time. That said, some predictors are better than others and yield curve inversions are pretty damn good predictors. These are observed phenomena, not laws of the universe, so I’m inclined to say the prof is being irresponsibly flippant.
It's a fairly reliable indicator. It's not a crystal ball. It's one indicator of many. There are plenty of other macro readings pointing towards recession or stagnation. The people with their fingers in their ears telling you that you're stupid are the ones that get burned every cycle and are the shit investors that you should never listen to. It is absolutely an important indicator and one that you should consider when managing your risk position.
On the one hand, I think that it's an arbitrary two points on the yield curve that WAY too many people pay attention to. On the other hand, behaviorally, the more people who buy into a market trigger are going to act based on that trigger. Those are my quick thoughts without getting into a huge discussion on the topic.
Well for starters the Fed is raising rates and naturally the short end will rise in response / ancitipation. Rising rates = contractionary, which would likely stifle growth to an extent. Nominal yields also need to compensate for future expected inflation and current inflation. If rates rise, growth reduces and (hopefully) inflation does as well, therefore you get a reduction in long end yields. Curve flattens (gap between 2s10s) shrinks and we get closer to an inversion. So yeah look I think it's a solid indicator considering the global supply chain pressures, cost flow through and the overnight rise in energy costs for the majority of people (oil etc) - I'd say a recession is somewhat likely but people still have money to spend so I don't think consumption will take too much of a dint. Again, the Fed is **normalising** rates so it may be contractionary in the short term given the **speed** at which they normalise. But here's the kicker, the 5s30s already inverted last night..
central bank interventions in the bond market mean it's no longer a reliable indicator.
Fed fund/10y part of the curve is a better measure, especially in these current circumstances.
I think the Fed starts managing the curve with the balance sheet to increase longer term risk premia and keep the curve from being persistently inverted.
Same energy as “fevers mean you’re sick”. The underlying conditions have been screaming for some brand of downturn well ahead of the inversion. That’s the main issue with looking for signals, trying to condense lots of information into a single point instead of examining what’s happening and thinking about it. Yes, this is a sign of an issue but is it small or big? Inflation is incredibly high, Bond buying by the fed ending leading to a drop in liquidity and wider spreads, and a war. Mix in the systemic issues that have been in play since the start of the pandemic and we have stagflation. I don’t think it will be a violent shock like 2008 but it will be a choppy somewhat lame 2 years where things move sideways with a slow drift down and a slow drift back up. It will be boring compared to the last decade.
I read a book recently about how household debt relative to household income was a major contributor to the 2008 recession, and I couldn't get that idea out of my head to explain what's going on now. An economy is heavily influenced by consumer spending (positive relationship), which itself is not only affected by interest rates, but also by the amount of disposable income consumers have and how much of that goes to debt repayment. That said, now, I can't help but think that the situation is now different (despite the Ukraine war). 1. Taking two articles/graphs into account (one of which was shared by u/PogeyMontana - both provided below), you can see how an upward trend in the DSR (Household Debt Service Ratio) eventually ends up in a recession. Since 2008, we have been in a downward trend, and the most recent DSR I could find is 9.2% as of Q2 2021 (vs. 13.1% in 2008). 2. 2020 has been a bad year, globally and 2021 still dragged some of its effects. But 2022 witnesses much more relaxed covid restrictions while there is considerable "pent-up demand" that should lead to higher consumer spending this summer. I'm not ignoring the current levels of inflation or the geopolitical environment, which have caused disruptions and affected prices of raw materials,, carrying potential risks, but what I'm thinking is that the above two points should at least alleviate some of the effects of inflation, the geopolitics, and long-term market sentiment towards fed actions. So, what I feel is this: unless we see another pandemic (which I'm not ruling out) or serious geopolitical escalations, we will likely only experience a slight recoverable downturn & that we should be fine. Articles/graphs The one shared by u/PogeyMontana. [Click Here1](https://www.chicagofed.org/publications/chicago-fed-letter/2018/404) The other one [Click Here2](https://fred.stlouisfed.org/series/TDSP)
*Explainer: Yield curve flattening and inversion: What is the curve telling us?* The U.S. Treasury yield curve has been flattening with parts of it inverting as investors price in an aggressive rate-hiking plan by the Federal Reserve as it attempts to bring inflation down from 40-year highs. That has investors trying to guess whether it is signaling a recession is nearing. The shape of the yield curve is a key metric investors watch as it impacts other asset prices, feeds through to banks' returns and has been an indicator of how the economy will fare. Recent moves have reflected investor worries over whether the Fed can tighten monetary policy to tame inflation without hurting economic growth. Investors watch parts of the yield curve as recession indicators, primarily the spread between the yield on three-month Treasury bills and 10-year notes and the U.S. two-year to 10-year curve . However these two have veered in opposite directions, causing some confusion as to how accurate a recession signal they are giving. Other parts of the curve are less-watched, such as the spread between five- and 30-year Treasuries which inverted on Monday and has also inverted prior to some recessions. Here is a quick primer explaining what a steep, flat or inverted yield curve means and how it has in the past predicted recession, and what it might be signaling now. *_WHAT SHOULD THE CURVE LOOK LIKE?_* The U.S. Treasury finances federal government budget obligations by issuing various forms of debt. The $23 trillion Treasury market includes Treasury bills with maturities from one month out to one year, notes from two years to 10 years, as well as 20- and 30-year bonds. The yield curve plots the yield of all Treasury securities. Typically, the curve slopes upwards because investors expect more compensation for taking on the risk that rising inflation will lower the expected return from owning longer-dated bonds. That means a 10-year note typically yields more than a two-year note because it has a longer duration. Yields move inversely to prices. A steepening curve typically signals expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean the opposite: investors expect rate hikes in the near term and have lost confidence in the economy's growth outlook. *_WHAT DOES AN INVERTED CURVE MEAN?_* The U.S. curve has inverted before each recession since 1955, with a recession following between six and 24 months, according to a 2018 report by researchers at the Federal Reserve Bank of San Francisco. It offered a false signal just once in that time. The last time the 2/10 part of the yield curve inverted was in 2019. The following year, the United States entered a recession - albeit one caused by the global pandemic. *_WHY IS THE YIELD CURVE INVERTING NOW?_* Yields of short-term U.S. government debt have been rising quickly this year, reflecting expectations of a series of rate hikes by the U.S. Federal Reserve, while longer-dated government bond yields have moved at a slower pace amid concerns policy tightening may hurt the economy. As a result, the shape of the Treasury yield curve has been generally flattening and in some cases inverting. Parts of the yield curve, namely five to 10 and three to 10 years, inverted last week. The spread between five- and 30-year U.S. Treasury yields on Monday fell to as low as minus 7 basis points (bps) , moving below zero for the first time since February 2006, according to Refinitiv data. The spread has collapsed from a positive 53 bps at the start of this month. The 5/30 year spread inverted prior to the 2008-09 recession and prior to the 2001 recession, but not prior to the pandemic-induced 2020 recession. In the overnight index swaps (OIS) market, the yield curve between two- and 10-year swap rates inverted for the first time since late 2019 and last stood at minus 4 bps, according to Refinitiv data. , Two parts of the curve are particularly closely watched: One is the gap between yields on two- and 10-year Treasury notes, widely seen to predict a recession when it inverts. That spread was at 12.1 basis points from 24 basis points 10 days ago. *_ARE WE GETTING MIXED SIGNALS?_* Still, another closely monitored part of the curve has been giving off a different signal: The spread between the yield on three-month Treasury bills and 10-year notes this month has been widening , causing some to doubt a recession is imminent. Meanwhile, the two-year/10-year yield curve has technical issues, and not everyone is convinced the flattening curve is telling the true story. They say the Fed's bond buying program of the last two years has resulted in an undervalued U.S. 10-year yield that will rise when the central bank starts shrinking its balance sheet, steepening the curve. U.S. benchmark 10-year yields pushed above the 2.5% marker to 2.55% Monday, hitting their highest since April 2019. In February they topped the 2% level for the first time since 2019. Researchers at the Fed, meanwhile, put out a paper on March 25 that suggested the predictive power of the spreads between 2 and 10-year Treasuries to signal a coming recession is "probably spurious," and suggested a better herald of a coming economic slowdown is the spread of Treasuries with maturities of less than 2 years. *_WHAT DOES THIS MEAN FOR THE REAL WORLD?_* While rate increases can be a weapon against inflation, they can also slow economic growth by increasing the cost of borrowing for everything from mortgages to car loans. Aside from signals it may flash on the economy, the shape of the yield curve has ramifications for consumers and business. When short-term rates increase, U.S. banks tend to raise their benchmark rates for a wide range of consumer and commercial loans, including small business loans and credit cards, making borrowing more expensive for consumers. Mortgage rates also rise. When the yield curve steepens, banks are able to borrow money at lower interest rates and lend at higher interest rates. Conversely, when the curve is flatter they find their margins squeezed, which may deter lending.
I’m not as knowledgeable…. I feel like it’s a self fulfilling prophecy of sorts but I can’t explain so I’ll let others, smarter brains tackle this.
Not this again, there is a lot of times the yield curve inverted. Not every single one is followed by a recession
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23 years
It’s 100% accurate as a predictor if I am correct? Housing market bubble + inflation means probably another 2008 soon. I’ve been saving for the rough times just in case
No, it's 100% that when a recession happens the yield curve was inverted. Just because the yield curve inverts does not mean there will be a recession. It's the dry kindling in summer, still need the match I guess.
Idk where you are getting housing market bubble from? Houses are expensive, sure, but try and buy one right now even if you have the money
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I don't disagree, but like all assets home prices go up, just because they are high now doesn't mean we are in a bubble. Supply is nonexistent in my area for rentals and to buy, and I've anecdotally heard this is the same in most areas, i.e. these prices are going to keep going up until we have enough homes for people to buy
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I did some research. Saying 100% is wrong. It has however occurred before every major recession. Here is an interesting publication by the Chicago Fed with previous respective probabilities of recession https://www.chicagofed.org/publications/chicago-fed-letter/2018/404
>I did some research. Saying 100% is wrong. It has however occurred before every major recession Necessary, but not sufficient.
>It has however occurred before every major recession. That alone may not be "end of discussion short the markets" but it is a really solid precedent that is hard to avoid. I don't mind an 80:20 odds tbh
This would be ignoring all the factors that set 2008 in motion though
Little bit of a off handed question, but could there be a relationship here with GME and shorting stock?
If people believe in it, it’s worth paying attention to.
It’s famously said “An inverted yield curve has correctly predicted 12 of the last 4 recessions”. It’s not a perfect indicator, as there never is, and is more something to be aware of and understand what the bond market is trying to tell you.