The part of the yield curve most closely watched by the market inverted very briefly Tuesday.
As of 1:33 p.m. ET Tuesday afternoon, Bloomberg data showed that the yield on the US 10-year Treasury Note (^TNX) briefly dipped below the yield on the US 2-year Treasury Note. The inversion lasted only a few seconds, and until 3:00 p.m. ET (the settlement time for US Treasury futures), the curve remained uninverted, with about 0.05% separating the returns of the two securities.
Yield curve inversion has been an indicator of recession for the last half century. But others say the Federal Reserve’s unprecedented firefight with high inflation would make a yield curve inversion different than it has in decades past.
This phenomenon has a strong track record of predicting a recession; Each of the last eight recessions (since 1969) has been preceded by a fall in the 10-year bond yield below the 2-year.
The “yield curve” depicts US Treasuries of different maturities and typically shows longer-dated Treasuries (such as those with 10-year or 30-year maturities) with higher yields than shorter-dated Treasuries (ie, 3 months or 2 years). running times).
[Read: Bonds, yields, and why it matters when the yield curve inverts — Yahoo U]
The curve “inverts” when shorter-dated Treasury yields rise above longer-dated Treasury yields. Points on the curve have already reversed in recent weeks (3-year-old and 5-year-old on March 18, 5-year-old and 30-year-old on March 28).
But the 2-year and 10-year points are often considered because they are among the most commonly traded maturities. An inversion at these specific points has correctly predicted a recession with a lead time of between eight months and two years in each of the last eight recessions.
recession coming?
However, there is nothing in bond pricing that directly triggers a recession. For example, the first warning of a recession ahead of the 2020 downturn came in the form of a yield curve inversion in August 2019. But little did the financial markets know that a global pandemic would be at the root of this recession.
The story goes on
And despite the inversion’s strong track record of predicting recessions, some strategists have cautioned that more context is needed when looking at this year’s inversion between 2- and 10-year returns.
In the face of rapid inflation, the Federal Reserve is raising interest rates as quickly as possible since 1994. Bond markets were forced to quickly rerate by this policy shift, meaning inversions could be a temporary side effect of the Fed’s actions (rather than a more fundamental market concern about duration risk).
“Right now there’s some real distortion in the yield curve,” JPMorgan Asset Management’s Meera Pandit told Yahoo Finance on March 21. She added that there are also two other narratives that are keeping yields low at the longer end (thereby flattening and inverting the curve): foreign interest in US Treasuries and the Fed’s direct ownership of trillions of dollars in US Treasuries.
BofA Global Research wrote on March 25 that an inversion in the yield curve is likely given a US economy posting its fastest jobs recovery (now at a near-historic low unemployment rate of 3.8%) and GDP growth returning to pre-pandemic levels had, a “distraction” would be levels.
“In our view, the bottom line is that near-term recession worries are probably overdone,” wrote BofA Global Research on March 25.
Brian Cheung is a reporter covering the Fed, the economy and banks for Yahoo Finance. You can follow him on Twitter @bcheungz.
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