Typically a sign of a coming recession, some experts think the inverted yield curve could be telling a different story.
Key Details
- Ten-year Treasury bonds yields are now lower than 3-month Treasury bills—marking one of the most inverted yield curves in 20 years.
- Typically, an inverted yield curve signals a recession—but some are suggesting that the current conditions may be different.
- An inverted yield curve has been a forerunner of recession for nearly 60 years, Axios reports.
- When investors anticipate that the bank will cut rates ahead of a recession, the yield curve shifts.
Why it’s news
Economic uncertainty has plagued the market over the last year with many experts warning about an impending recession. And yet, contradictory recession indicators continue to appear.
For example, the job market remains favorable despite economic worries.
There are many economic indicators that experts use to predict recession or other market disruptors. The yield curve is just one of them, but it is among the most reliable and popular.
Marking the largest inversion in nearly 20 years, 10-year Treasury bonds yields are now 0.61 percentage points behind the 3-month Treasury bills—while normally they would be higher instead of lower.
In the past when the yield curve has been inverted, investors are expecting the bank to cut rates in order to fight back recession. However, the current inversion is caused by other activity.
More investors are growing confident that the high interest rates imposed by the Federal Reserve will reduce inflation—meaning interest rates will fall in the near future. Rather than an inversion caused by economic uncertainty, the inversion has been prompted by economic optimism.
This change in behavior doesn’t necessarily mean that the market will avoid a recession, it just indicates that the yield curve may not be as reliable an indicator this time around.