Market Commentary

Inverted Yield Curve as Predictor to a Recession

When the yield on a two year treasury bond is higher than the yield of a ten year that is called an inverted yield curve and it has been the predictor of a recession 8 times in a row. Currently the yield for the short term bond is rising while the long term is not. This is normally how it starts on its way to inversion. It does not always continue but is something to watch.

With the unprecedented Federal Reserve’s involvement in lowering and raising interest rates since the great recession, with the result being a very low current interest rate and a FED determined to raise those rates will they cause an inversion and will that result in a recession?

Some say that a flattening yield curve, the precursor to an inverted yield curve is not signaling a recession this time around. Globalization of the bond market and the zero interest rate in Europe and Japan has made the U.S. bonds much more attractive causing long rates to remain low thus not a sign of recession in the offing.

It is hard to argue the consistency of the predictive nature of an inverted curve and I don’t think it will be different this time just because a change in global dynamics that affects the U.S. bond market. Then again there is no one indicator that is always correct.

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