First Inversion in Seven Years: Can a Recession be Far Off?

The 5-year to the 3-year portion of the yield curve inverted today. Inversion is typically a prelude to recession.

Yield Curve Produces First Inversion in 7 Years

I have been watching the 5-3 and 3-2 yield spreads for months expecting an inversion would first occur there. Today, that happened.

Bloomberg also caught it, noting Flattening Yield Curve Just Produced Its First Inversion.

The spread between 3- and 5-year yields fell to negative 0.6 basis points Monday, dropping below zero for the first time since 2007. It’s probably not the best-known measure of the curve. The 2- to 10-year gap may have that honor. But Monday’s move could be the first signal that the market is putting the Federal Reserve on notice that the end of its tightening cycle is approaching.

Some analysts cautioned against reading too much into Monday’s inversion.

“It’s a minor part of the curve,” said NatWest Markets strategist John Briggs. “I don’t think it necessarily foreshadows anything.”

3-2 Inversion Coming Up

A 3-2 inversion is now in the batters box. I expect a base hit shortly.

Here are some charts that I have been watching. Fred is a bit behind on posting data so my charts date back to last Thursday.

Yield Curve Spreads 1980-Present

Yield Curve Spreads in 2018

Yield Curve Spreads October 19 - November 29

Change in Yield Curve Spreads

Curiously, the 10-7 spread rose since October 19 while the rest of the curve flattened.

I disagree with the opinion of John Briggs. This is a strong recession warning. With the next hike, I expect more portions of the curve will invert.

The classic recession signal that most follow is a 2-10 inversion. I doubt we see a 2-10 inversion before recession hits.

My call: There will not be the warning nearly everyone is waiting for.

Mike "Mish" Shedlock

Comments (6)
No. 1-5
Schaap60
Schaap60

It looks like the 2-5 also inverted slightly. If the Fed does get at least two more quarter point hikes in, with the 2-10 spread at only 15 basis points, that part of the curve may invert too. If the Fed can't get a December and March hike in because of slowing data, a recession would seem to be very imminent.

Of course the 2-10 may invert sometime in the spring and we'll only find out the inversion occurred after the start of the recession when the recession itself is finally dated. It'll be interesting to see how rates move with the next hike.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Good Spot! 2-5 Also Inverts Thank!

Blurtman
Blurtman

Next, tea leaves predict Super Bowl champ.

bradw2k
bradw2k

Harry Dent just called new highs coming to markets before a crash in 2H2019 -- making that scenario less likely.

Mish, is it possible the recession already started but it will be several months before the necessary statistics catch up?

Casual_Observer
Casual_Observer

Those that have been calling a recession before 2020 will end up being correct. Technically the world has been in a recession for about a year and the US will soon join it. I expect that this first recession will be shallow but we get a double dip once the Fed cuts rates in 2020. When there is nothing left to cut in 2021 and deficits are so high that even at near 0 rates, the US budget deficit skyrockets, all bets are off.