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Yield Curve Inverts; Gold Awaits

Apr. 04, 2022 10:29 AM ETTLT6 Comments
Gary Tanashian profile picture
Gary Tanashian


  • It appears that the 10yr-2yr yield curve is seeing to some unfinished flattening business from the pre-pandemic period.
  • After inverting deeper than the 2019 inversion, a "steepener" will eventually follow. Inversion is not a cause to worry, but a subsequent steepening would be.
  • A curve steepener can be inflationary or deflationary. Don't bet on the next steepener being inflationary (as the 2021 steepener was, and as inflation makes all the headlines today).

Inverted Yield Curve with aerial view of New York City

Melpomenem/iStock via Getty Images

Yield curve inverts deeper than August, 2019

Like the larger media, this tiny little spec within the media reports the news to you. The 10yr-2yr yield curve has inverted (ref. Yield Curve inversion upcoming). Now, what

This article was written by

Gary Tanashian profile picture
Gary Tanashian is proprietor of NFTRH.com. Actionable, hype-free technical, macro economic and sentiment analysis is provided in the premium market report 'Notes From the Rabbit Hole' (http://nftrh.com/nftrh-premium/). Complimentary analysis and commentary is available at the public website (https://nftrh.com).

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

No individual stocks were mentioned. I am long stocks (incl. commodity related), precious metals and cash for risk management.

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Comments (6)

TDune75 profile picture
If there's an upcoming deflationary recession coming in 2023, the only place to be invested is cash, because every other asset class goes down in value, relative to cash. That includes gold. I happen to agree with the author that there's deflation rather than inflation on the distant horizon, except for certain key commodities that the world's population needs to stay alive (grains, energy, fertilizer, water ... & cell-phones).

Heaven forbid a parent takes away their teenage daughter's cell-phone. Hence I've invested accordingly. Currently 75% cash, which drives my investment brokerage nuts. I'm not playing the game Dimon wants small retail investors to play.
David de los Ángeles Buendía profile picture
Hello @Gary Tanashian ,

There is no "The Yield Curve". There are many yield curves. They are not all created equal.

Most economists, including the Federal Reserve Bank of Cleveland (FRBC), use the 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity (T10Y3M) curve [1]. The FRBC has an entire research arm dedicated to the assessment of the T10Y3M [2]. This yield curve is stable. It has not inverted.

The T10Y3M has historically peaked between 350 and 400 basis points (bp) usually two or three years after the inversion. It is just now only two years after the first inversion and the spread is only 185 bp[2]. This might suggest that yield curve has not yet peaked and a recession is not yet within the foreseeable future.

Credit and interest rates follow the Business Cycle. Generally longer term forms of credit pay more on interest then do shorter term forms. The spread between the interest on short term credit is high early in the Business Cycle as there is more demand for long-term credit early in the cycle and less demand later in the cycle. Demand for short term credit is more stable and does change as much.
More importantly, the market for long-term credit is very elastic while the market for short-term credit is very inelastic. As a result small changes in demand for short-term credit causes large changes in the price, i.e. the interest rate while the price of long term credit is much more stable. It is this difference in elasticity and volatility that accounts for the fact that the difference between interest rates for short term credit and long term credit peak just before a recovery and bottom-out just before a recession.

In some types of credit, this spread in yields over the term of the credit, that is to say, the Yield Curve, can even invert with short term forms of credit yielding higher interest than shorter term forms. The Yield Curve for some UST securities invert just before a recession but all yield curves are at a minimum before a recession.

This yield curve, and others like it, have nothing to do with inflation or deflation.

[1] fred.stlouisfed.org/...
[2] www.clevelandfed.org/...
Gary Tanashian profile picture
@David de los Ángeles Buendía Which is why I called it the "10yr-2yr" yield curve. That was the subject.
David de los Ángeles Buendía profile picture
Hello @Gary Tanashian ,

Yes, it is A yield curve but it is not THE yield curve. The 10 Year - 2 Year United States Treasury (UST) securities spread is not as reliable a predator of pending recessions or economic growth, at least not as reliable, as the 10 Year - 3 Month spread.
Great little piece with exceptional signal to noise ratio. Thanks.
Gary Tanashian profile picture
@Robin Heiderscheit Thanks. I can get wordy and noisy too, but I am working on it. :-)
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