History Tells Us Why The Fed Should Take The Inverted Yield Curve Seriously
The recent inversion of the US yield curve has seen many interpreting this as the harbinger of a recession in 2020. Fears of a US recession because of an inversion of the yield curve should be disregarded this time, analysts at the Royal Bank of Canada have suggested. The bond market appears to be forecasting a future recession. Well, in order to obtain a 10-year bond, each investor will offer more favorable conditions to the US government — that is, each investor will ask for a lower yield so that the issuer of the bond sells it to them rather than other people.
In December 2018 portions of the yield curve inverted for the first time since the 2008-2009 Recession 15 However the 10-year vs 3-month portion did not invert until March 22 2019 and it reverted to a positive slope by April 01 2019 (i.e. only 8 days later).
This so-called inversion of the yield curve has happened before the last five recessions. One question often posed by investors is whether inverted yield curves predict a future stock market decline. The 30-year rate later moved off those lows to trade at 1.916%, still below yields on U.S. debt of far shorter duration such as 3-month and 1-month bills.
Views are those of Emily R. Roland, CIMA, head of capital markets research, and Matthew D. Miskin, CFA, market strategist, for John Hancock Investment yield curve inversion Management, and are subject to change. Taken together, the yield fall in the two-year Treasury note along with the slump in the spread between the three-month Treasury yield and the 10-year note (the Fed's preferred inversion metric) raise recession fears among investors.
Longer-term rates below shorter term rates are a clear signal from bond investors that they think the United States economy is on the downswing — that its future looks worse than its present. Inversions have a strikingly accurate record for forecasting recessionsâ€, researchers from the San Francisco Federal Reserve concluded last year, noting they have preceded each of the nine US recessions over the last 60 years.