A Kink in the Curve - March 27, 2019

The yield curve plots yields on Treasury bonds with various maturities, typically 1 month to 30 years. Normally, yields rise as the maturity lengthens.

Recessions have historically been preceded by an inverted yield curve, i.e., the shorter-dated maturities yield more than the longer-dated maturities.

  • On March 22nd, the yield on the 3-month T-Bill exceed the yield on the 10-year by 0.02 percentage points: 2.46% vs 2.44% (US Treasury Dept).
  • It’s the first time this has happened since 2006 (St. Louis Fed).

We’ve had seven recessions since the 1969-70 recession (NBER). All were preceded by an inversion. A recession ensued an average of 11 months later.

Is it different this time?

Economic growth has slowed, and odds of a rate cut this year are rising. The inverted curve is signaling economic uncertainty, but a near-term recession? Maybe not.

  • The Conference Board’s Leading Index® is not declining.
  • The all-important 10-year – 2-year bonds have not inverted.
  • Low yields in Europe may be encouraging bond buys in the U.S., which would depress long-term yields at home.
  • The term premium is usually positive; it’s negative today, which is depressing longer yields and potentially distorting the yield curve.
  • The Fed has shifted gears, which has put downward pressure on longer yields.

Investor’s corner

Recession are preceded by major economic imbalances and/or unexpected inflation, which forces the Fed to aggressively hike interest rates. Neither conditions are currently present, lessening odds a near-term recession is lurking.