US 10-Year Bond Yield Inverts with 3-Month & 1-Year: Early Recession Warning

March 22, 2019

By CountingPips Research

(Yield Curve Inversions with Recessions in grey)

The US Treasury benchmark bond market inverted earlier today and according to history, a recession warning is triggered. Yield curve inversions occur when the yield on a longer-term bond falls below that of a shorter-term bond, signaling a sort of ‘upside-down’ situation that happens very rarely in the bond markets.

The benchmark 10-Year bond yield has fallen to a low of 2.43 percent in markets today while the yield on the 3-Month bond has held steady at the 2.46 percent level. This means there is a -0.03 inversion in the 10Year-3M curve.

The 1-Year bond yield has also been stable around the 2.46 percent level for an identical -0.03 inversion in the 10Year-1Year curve.

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The shorter end of the yield curve (5-Year yield) has actually been inverted since December and today, the 5-Year bond yield (2.25%) has  accelerated further below both the 3-Month (2.46%) and the 1-Year (2.46%).

The historical significance of a yield curve inversion is that it can be a reliable warning that a recession will occur anywhere from approximately nine months to two years after the inversion.

The reasoning goes that investors are rushing into longer-dated treasuries (10-Years) because the growth outlook is diminished in their eyes and warrants a flight to safe assets.

The inversion of the yield curve does not mean that it is an absolute certainty a recession will happen but the track record has been pretty good.

According to the Cleveland Federal Reserve — which does a great job of tracking this monthly, (although not up to date yet) — the inverted yield curve has predicted the last seven recessions.

By CountingPips Research

All information and opinions on this website are for general informational purposes only and do not constitute investment advice.