Yield Curve Steepens but Recession Risks Haven't Faded

The yield curve has steepened considerably in the past month. Some think it means recession risk has diminished.

Yield Curve Debate

A longer-term picture will put the steepening in perspective.

10-Year Minus 2-Year Treasury Yield

The yield curve has not inverted this time. But what if it doesn't. There is no universal law that says the yield curve will invert before a recession. Look at Japan for proof.

With so many eyes on the yield curve flattening, perhaps it doesn't.

Mike "Mish" Shedlock

Comments (11)
No. 1-8
Pater_Tenebrarum
Pater_Tenebrarum

In fact, the recent steepening may be the very signal indicating that recession risk is now rising.

Realist
Realist

The expansion of the global suppply chain over the last 3 decades has been a tremendous deflationary force as well as a force for global growth. With Trump lobbing grenades in his attempt to disrupt the global supply chain, the result will be higher inflation and slower growth. This may increase the chance of a recession. Looking at your chart is more like looking at the effect, not the cause.

Carl_R
Carl_R

Note than in all the cases above, the recession started after the rate curve began to steepen again.

DFWRealEstate
DFWRealEstate

As Dr. Hunt explained, debt is deflationary...and we're drowning in it! I suspect that quantitative easing will go down in history as one of the greatest frauds of all times, but it did make bankers and Wall Street executives fabulously wealthy.

"The current 30-year treasury rate at 3% seems ridiculously low. In the near future, at 1.5%, the 3% yield will seem generous."

Jamesross
Jamesross

From Hoisington.com

A great deal of analysis has been done on this subject. Recently, San Francisco Fed economists conducted a study on various spreads in the treasury market. Using monthly data from January 1972 through July 2018, they looked at each spread and predicted whether the economy would be in recession 12 months in the future. The study found that the ten year-three month (10y- 3m) spread was the “most reliable predictor” in signaling a recession. One of their conclusions, however, was that while the risk of recession might be rising, the flattening of the 10y-3m yield spread does not currently signal an impending recession. They also correctly pointed out no causality. The spread at the time of the article was +100 basis points (bps), or 1%. As recently as late August, the spread was down to the low 70s, but, quite volatile, it has recently reversed higher.

Jamesross
Jamesross

From Hoisington.com

As this chart reveals, if this yield spread is still positive but falls below +40 bps, there is a more than reasonable possibility of a decline in economic activity. The spread is quite variable, but at +73 bps, which it was in August, is close to the +40 bps level which would signal an outright recession. Two more 25 bps hikes in the Federal Reserve target rate may be sufficient to move it to a full recession signal.

dulevot
dulevot

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Gross Profit
Gross Profit

The 10-yr UST interest rate is no longer a market rate, due to the selling (manipulating) of long term Treasury prices by the Fed. Quantitative Tightening is surely pushing the interest rate higher than it would be otherwise. The inherent intelligence that is transmitted by rates and curves is now muted. Treasuries sold off during sharp stock market downturns in March and now in October. That is exceedingly rare, and demonstrates that the Fed is triggering selloffs via QT and hiding the danger signals that would be there. The Fed is engineering the end of this cycle and wants a recession. Beware.