Saturday, September 21, 2019

The Yield Curve Inverted Again

It happened again.

The yield curve briefly inverted on Wednesday as the 2-year Treasury note yield rose above the 10-year Treasury note. That’s a reversal of the usual relationship in which long-term bonds pay more than short-term bonds.

The yield curve was once regarded as a reliable signal of a recession. For over 50 years, recessions have started on average 15 months after the 2-year yield rose above the 10-year.

More recently, however, many market watchers have begun to doubt its predictive ability. Some say ultra-low interest rates may have undermined the signal. Others say that, unlike past inversions, this one comes in the context of a Fed that is cutting rates.

The trouble is that many economists and investors found very good reasons to doubt the last two inversions were predicting a recession. But recessions followed.

The market appeared to take Wednesday’s inversion in stride. The major stock indexes ended the day in the green.

And the inversion lasted only a few minutes starting around 3:50 p.m. By 4 p.m., the curve was positive again

John Carney

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