Are You Ready For An Inverted Yield Curve?
Summary
- While most models/gauges keep telling us that a recession isn't on the horizon, the yield curve spells trouble.
- Spreads between 5- minus 3- and 5- minus 2-year US Treasury yields have turned negative today for the first time since 2007!
- Should the spread between 10- minus 2-year Treasury yield follow through - we are likely to enter a new ball game.
- This is exactly what happened over the past seven recessions. There's no reason why this time be different.
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Is a recession ahead of us? It's now more than just a few warning-nervous signals.
Shortly after we expressed our views that both rates and yields are likely to peak in 2019, and it seems like we may have been a bit too... hawkish!...
In case you've missed it, the gap between 5-year & 3-year Treasury yields (BIL, SHV, SHY, VGSH, SCHO, STIP) has just inverted.
Below, you can see how it looks on a longer time frame. It's easier and scarier to see how rare this is on one hand and what may be waiting for us head on the other hand.
Shortly after the 3s5s inverted, the 2s5s followed through:
There you go.
The flattening yield curve just produced its first two inversions.
Spreads between 5- minus 3- as well as 5- minus 2-year Treasury yields fell below zero.
Although the more closely watched 2s10s gap is still in positive territory, it's trading at the smallest gap since 2007.
Spread between 10- minus 2-year Treasury yields has moved within ~14bps of going negative. If the Fed moves ahead with a 25bp hike on 12/19, as is widely expected, the 2s10s yield curve could easily outright invert.
It was less than three months ago when we showed that credit/yield-based models suggest that there are little odds for a recession to arrive soon. Well, it now seems that these models perhaps are/were too cautious.
True, real rates are far from signaling a recession in the US.
The latest reading at -0.15% being way off the average/median 3.4%/2.7% readings that precede a recession.
Same goes for this indicator which is not yet flashing red.
Looking at the past 7 recessions since the early '70s, the LEI turned negative Y/Y ahead of every single recession. Last reading showed a very strong 5.9% Y/Y. This is a major plus for the "no recession in 2019" camp.
Nevertheless, the yield curve is spelling trouble and should the 10-2 US Treasury (IEF, GOVT, SCHR, VGIT, TIP, IEF, TLT) spread inverts - we are likely to see a major shift in investors' sentiment.
We are keeping a close eye on that very reliable gauge that hasn't failed (to predict an upcoming recession) in any of the past seven recessions.
We suggest you to do the same.
Better waste a bit of time than a lot of money.
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