Just The Current Yield Curve Tightness Makes A Midyear 2019 Slowdown Likely; What Happens Next Is Up To The Fed

Aug. 28, 2018 11:10 AM ET8 Comments
New Deal Democrat profile picture
New Deal Democrat


  • Similar yield curve tightness, without ensuing recessions, happened 4 times in the 1980s and 1990s.
  • In each case, a significant slowdown ensued, first showing up in short leading indicators and ultimately in the GDP.
  • In all 4 cases, the Fed intervened to lower rates, in 3 of them almost immediately after the current level of yield curve tightness.
  • As the likely slowdown materializes, will the Fed back off?
  • If they don't, will the President intervene to install more dovish Governors?

Introduction: 4 times in the 1980s and 1990s, the yield curve got as tight as it is now before steepening and without an ensuing recession

A few weeks ago, I pointed out that 4 times in the past 40 years - twice in the 1980s and twice in the 1990s - a compressed yield between the 2- and 10-year treasury bond similar to current conditions had occurred without a recession ensuing. But all 4 of those occasions resulted in a slowdown of economic activity.

Since then, the yield curve has only gotten tighter, with the 2- to 10-year spread narrowing to 0.19%, and the 3-month to 10-year spread narrowing to 0.71%.

Meanwhile, checking back on my Weekly Indicator columns, I find that in January the long-term forecast was positive. By the end of March, I was calling it "weakly positive." A month later, it was "edging towards neutrality," and by the first week of June, it was neutral. For a week earlier this month, it turned negative, and the YoY comparisons are only getting harder.

A long leading forecast that is not positive but only flat for 3 months ought to mean something a year or so later. So, I decided to update my look at the 4 occasions in the 1980s and 1990s that the Treasury market curve resembled that exists now.

First of all, here is a look at the 2-year to 10-year spread (blue) and 3-month to 10-year spread (green) for the 1980s and 1990s, from which 0.19% and 0.74%, respectively have been subtracted so that those values are at the zero line:

To be more precise:

  • The 2- to 10-year spread fell to precisely 0.20% for one day - August 22 - in 1984.
  • It got as low as 0.42% in February 1986.
  • It got as

This article was written by

New Deal Democrat profile picture
New Deal democrat As a professional who started an individual investor for almost 30 yeas ago, I quickly focused on economic cycles and the order in which they typically proceed. I have been writing about the economy for nearly 15 of those years, developing several alternate systems that include mid-cycle, long leading, short leading, coincident, lagging and long lagging indicators. I also focus particularly on their effects on average working and middle class Americans.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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