Yield Curve Sounding ‘Loudest Alarm’ Over Recession, Analysis Suggests

CUToday 

 NEW YORK–One of the most watched indicators over whether a recession is approaching is “sounding its loudest alarm”—the yield curve, according to one new analysis.

As every credit union portfolio manager and CFO is aware, the standard yield curve should show rates moving higher as terms grow longer, hence, the “curve.” But every once in a while, short-term rates rise above long-term ones, known as an inversion, and such inversions have preceded every U.S. recession over the past 50 years.

“And it’s happening now,” the New York Times reported, adding, the yield curve has predictive power that other markets don’t.

On July 20 the yield on two-year Treasury notes stood at 3.23%, above the 3.03% yield on 10-year notes. A year ago, by comparison, two-year yields were over one percentage point lower than the 10-year yields, the Times reported.

“…Over the past nine months, the Fed has become increasingly concerned that inflation isn’t going to fade on its own…By next week, when the Fed is expected to raise rates again, its policy rate will have jumped about 2.5 percentage points from near zero in March, and that has pushed up yields on short-term Treasurys like the two-year note,” the Times report stated. “Investors, on the other hand, have become increasingly fearful that the central bank will go too far, slowing the economy to such an extent that it sets off a severe downturn. This worry is reflected in falling longer-dated Treasury yields like the 10-year, which tell us more about investors’ expectations for growth.”

Not the ‘Gospel,’ But…

The Times analysis went on to add, “What sets the yield curve apart is its predictive power, and the recession signal it is sending right now is stronger than it has been since late 2000, when the bubble in technology stocks had begun to burst and a recession was just a few months away.”

Greg Peters, co-chief investment officer at PGIM Fixed Income told, the Times, “The yield curve is not the gospel, but I think to ignore it is at your own peril.”