One of the most closely watched signals of a recession turned red this week – but some strategists are warning not to panic yet.
A key part of the US Treasury yield curve briefly inverted Tuesday for the first time since 2019. The yield on the benchmark 10-year note (^TNX) briefly fell below that of the 2-year note around 1:33 p.m. ET on Tuesday, according to Bloomberg data.
Such an inversion has preceded each of the last eight recessions since 1969 — although there have been more inversions than downturns during that period.
“We want to make sure we’re not focusing too much on the yield curve issues, which some people think signals a recession,” JoAnne Feeney, partner and portfolio manager at Advisors Capital Management, told Yahoo Finance Live on Wednesday.
“We think it’s very dangerous at this point to use historical episodes of yield curve inversion to predict what’s going to happen now,” she added. “Because if you look at some of the broader economic data, we see that the JOLTS report came out on Tuesday – job openings [are at] 11 million, 5 million or so more than the number of job seekers. So companies are really trying to expand. So when we think of reopening, we’re still coming out of COVID and COVID-like behavior.
“Low risk of recession”
A yield curve inversion itself does not cause a recession. However, the spread between certain Treasury yields shows how investors are weighing the risks to the economy.
Longer-dated government bond yields may fall as traders’ confidence in the economic outlook deteriorates. At the same time, with the US Federal Reserve set to embark on a series of rate hikes this year, market participants have priced in the likelihood of higher near-term rates, which has helped push shorter-term bond yields higher.
Aside from the 10-year and 2-year yields, other parts of the curve have also inverted over the past week. The spread between 5-year and 30-year yields turned negative for the first time since 2006 on Monday.
The story goes on
Despite these inversions and the general flattening of the US Treasury yield curve, other strategists have warned against betting on a recession too soon.
An inverted yield curve doesn’t always predict a recession, and when it does, it takes time, experts say.
“We continue to believe the U.S. economy has little threat of a recession over the next 12 months, but the bond market insists on whistling a different tune,” DataTrek co-founder Nicholas Colas wrote in a note Wednesday morning.
Likewise, Invesco chief markets strategist Kristina Hooper noted that there are “some caveats” to considering an inverted yield curve, a signal of economic contraction.
“First of all, to be a very accurate indicator, it has to invert for some time, usually three months,” she told Yahoo Finance Live on Tuesday. “Second, it is a longer-term indicator. So, after the yield curve inverts, it typically takes about 18 months for a recession to hit. And it’s a horrible, horrible sell signal because stocks usually have room to run significantly higher after a yield curve inversion.”
In the near term, however, the economic outlook was bleaker – particularly given the uncertainties surrounding the Russia-Ukraine war, elevated inflation and the economy’s ability to hold up in the face of tighter monetary policy from the Federal Reserve.
“You have to watch how much inflation will eat away at consumer spending. Most of that impact will affect the income distribution at the bottom,” said Advisors Capital Management’s Feeney. “The middle group might go to a TJ Maxx (TJX) to shop instead of shopping at Nordstrom (JWN) or Macy’s (M).”
“So you want to know how consumer spending is affected by inflation and still find the opportunities for reopening,” she added.[It’s] work in progress, judging by the order numbers, judging by the production numbers that we’re seeing, semiconductor supply is going up. So there’s still a lot of recovery to be done.”
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Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter.
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