March Yield Curve Update: The 6-12 Month Mesa

Summary

  • The trend in the yield curve continues to be negative, though the rate of change has slowed.
  • The changes in the spread is being driven by the long end, the rates least in the Fed's control.
  • The 6-12 Month Mesa indicates investors believe rates will hold steady and then fall between 6-12 months from now.
  • Models based around the yield curve are starting to predict recessions coming sooner rather than later. The earliest seems to be the beginning of 2020.
  • The price of consumer and corporate risk is rising, but 2019 has seen a reversal of that.

Five Months of Flattening

I've been publishing on the yield curve since November, and in that time, the curve has undergone some changes.

Data: US Treasury

For some time, the most obvious feature of the curve was the 2-Year Elbow, seen here at 2.91% on the red line from November. The curve had that basic shape for most of 2018, until the very end. Then the 2-5 inverted, then the 1-Year Spike formed, and now we see that the 6-12 Month Mesa has formed, with those two rates flat and inverted all the way to the 7-Year. Currently, the 6-Month to 5-Year spread is -12 bps. I don't need to fit a line to show you how much the curve has flattened - just eyeball it. Eek.

You can watch the changes here:

Let's get a little zoomed in on Friday's close:

Data: US Treasury

While the much-declined 10-Year is holding up, the Mesa is inverted through the 7-Year. The 3-Year and 5-Year are flat or inverted with the effective Fed Funds rate. Double eek.

So What Does It Mean?

The obvious explanation is that market participants are anticipating Fed tightening or standing pat through the next 6-12, and then easing thereafter. This aligns with many predictions, including my own, of a US recession coming at the end of this year or the beginning of next.

So Why Should You Care?

The inversion of the 2-10 yield curve has preceded the previous 6 recessions by 6-24 months, usually closer to 6 months. To be clear, this is a symptom, not the cause of recessions, but it seems to be one of the more reliable predictive variables in this respect. The trend has been for a 2-10 inversion in late Q2 or Q3 for some time now.

Yield Curve Model and

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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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