The market’s most watched portion of the yield curve has been inverted for a very brief time Tuesday.
At 1:33 pm ET on Tuesday afternoon, Bloomberg data showed the yield on 10-year US Treasuries (^ degeneration) briefly fell below the two-year US Treasury yield. The reversal lasted only a few seconds, and by 3:00 PM ET (settlement time for US government bond futures) the curve remained uninverted with about 0.05% separating the bond yields.
Over the past half century, yield curve inversion has been an indicator of recession. But others say the Fed’s unprecedented fight with high inflation would make the yield curve inversion different from the yield curve inversion of decades past.
This phenomenon has a track record of predicting recessions. Each of the last eight recessions (dating back to 1969) has been preceded by 10-year bond yields that have fallen below the past two years.
The “yield curve” shows US Treasuries of different durations, usually showing longer-term Treasuries (such as those with 10-year or 30-year maturities) with higher yields than short-term Treasuries (ie 3-month or 2-year maturities).
The curve “inverts” when the yields of shorter-dated Treasuries are higher than those on longer-term bonds. The curve points have already reversed in recent weeks (3 years and 5 years on March 18, and 5 years and 30 years on March 28).
But the 2-year and 10-year points are often considered because they are among the most traded periods. A reversal at these correctly identified points has predicted a recession with a lead time of between eight months and two years in each of the last eight recessions.
However, there is nothing about bond pricing that leads directly to a recession. For example, the first warning of recession before the economic downturn in 2020 arrived in the form of a Yield Curve Inversion in August 2019. But financial markets did not know that the global pandemic would be the cause of that recession.
Despite the strong inversion record to predict the recession, some strategists have warned about it More context is needed when looking at this year’s reversal Between 2 and 10 year returns.
In the face of rapid inflation, the Federal Reserve is raising interest rates at their fastest pace since 1994. Bond markets have had to quickly re-price through this policy pivot, meaning reversals could be a temporary side effect of Fed actions (rather than a primary concern in the market regarding term risk).
“There are some real distortions in the yield curve right now,” JPMorgan Asset Management’s Mira Pandit told Yahoo Finance on March 21, adding that there are also two other narratives that keep long-term yields low (and thus flatten and reverse the curve): Foreign interest in Treasuries The US Federal Reserve’s direct ownership of trillions of US Treasuries.
BofA Global Research wrote on March 25 that a yield curve inversion would be a “distraction” given the US economy which has experienced the fastest labor market recovery (now with a near-historically low unemployment rate of 3.8%) and a return to pre-pandemic GDP growth. levels.
“In our view, the bottom line is that near-term recession fears are likely to be exaggerated,” BofA Global Research wrote on March 25.
Brian Cheung is a reporter covering the Federal Reserve, economics, and banking at Yahoo Finance. You can follow him on Twitter Tweet embed.
“Twitter practitioner. Beer evangelist. Freelance gamer. Introvert. Bacon aficionado. Webaholic.”