The inverted yield curve may not be the surefire predictor that Wall Street analysts say it is.
Key Details
- Since 1968, whenever the yield on long-term bonds has fallen below the yield on short-term bonds, there has been a recession.
- The inverted yield curve is a sign that investors have lost faith in the long-term prospects of the economy.
- But we have had an inverted yield curve since June and the economy hums along without any real signs of a recession.
why it’s important
In normal times, long-term Treasury bonds—typically, the 10-year notes—have higher yields than short-term bonds—the two-year note is the typical measure. But in certain economic conditions, the yield on long-term bonds falls below the yield on short-term bonds—and the inverted yield curve emerges.
Inverted yield curves are often interpreted to mean investors expect interest rate cuts—something that often happens during recessions.
For the last 50-plus years, an inverted yield curve has preceded eight of eight recessions—perhaps creating a self-perpetuating effect as it provides corporations justification for cost-cutting measures like layoffs. But now, we’ve had an inverted yield curve early last summer, and still no recession.
Tech companies could be cutting jobs and budgets expecting a recession that’s nowhere to be found.
In fact, yesterday JPMorgan analysts suggested that yields on 10-year notes might be pricing in a sharp decline in inflation. That would mean the Fed could stop hiking rates soon. They go on to say that it’s rare to see this much disinflation in such a short period of time.
Add to this, the signs that the economy is pretty strong: low unemployment and strong job growth, a relatively solid stock market, and some pretty strong earnings numbers.