It’s Predicted 18 of the Last 6 Recessions
In layman’s terms, it means that the interest rate yield of the 2 year bond dipped below that of the 10 year bond, which is unusual, because people typically want more return for tying up their money for longer periods.
It’s important to note that while every recession has been preceded by an inverted yield curve, not every inverted yield curve has been followed by a recession:
A closely watched recession signal flashed red on Tuesday, as investors fretted that the Federal Reserve’s efforts to tame inflation will bring about a sharp slowdown in US economic activity.
Two-year Treasury note yields rose above those of the 10-year for the first time since August 2019, inverting a portion of the yield curve monitored closely by Wall Street and policymakers. Inversions typically signal malaise about the economy’s long-term growth prospects and have preceded every US recession in the past 50 years.
Typically, a recession has followed in the two years after an inversion of this measure of the yield curve.
Two-year yields, which move with interest rate expectations, rose as high as 2.45 per cent, the highest level since March 2019. The two-year yield has risen by 1.64 percentage points this year as the US central bank has tightened monetary policy, including its first rate rise since 2018 in order to combat inflation that’s at a 40-year high.
The 10-year yield, which moves with inflation and growth expectations, fell as low as 2.38 per cent. The benchmark yield has also risen this year, albeit at a slower pace, as tighter Fed policy has curtailed inflation and growth forecasts.
After inverting, the gap quickly widened and the yield curve turned positive again, where it hovered at about 0.02 percentage points. At the start of the year, it stood at 0.77 percentage points.
The spread between five- and 30-year yields, another measure of the yield curve, on Monday inverted for the first time since 2006.
I have no inkling of when the next recession is going to hit, and neither do the financial journalists nor do the economists.
It will happen at some point, though probably not for at least 12 months, assuming that Covid does not explode over the next few months.