Investors and economists need to be paying attention
Of all the economic rules of thumb the COVID-19 pandemic seemingly ripped up, few have caused as much soul-searching as the inverted U.S. yield curve - though it may just be interpreted incorrectly.
But the problem is timing the turn. In the 19 months since the 3-month/10-year curve and 23 months since the “2s/10s” curve last inverted, respectively, recession is still nowhere to be seen and there is very little sign of it on the horizon. Crucially, in each of the past eight recessions that “uninversion” of the curve has been the result of a “bull steepening” where short-dated yields have tumbled as the Federal Reserve has cut rates in the face of very obvious economic or market stress.
If an inverted curve was the harbinger of imminent recession that people thought it was, a record long period of inversion would surely not have been accompanied by record high equities, the tightest credit spreads in years, and historically low volatility in stocks and currencies. Economic warning signs certainly are flashing. Factory activity is shrinking, consumer demand is softening, the U.S. economic surprises index is deeply negative, and some closely-watched GDP growth trackers are being revised down.
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