An inversion of the US Treasury note yield curve recently flashed in the bond market, a warning sign that has properly foretold almost every recession in the last 60 years.
An inverted yield curve is frequently interpreted as an indication that investors are more concerned about the short term than the long term, causing short-term interest rates to rise above long-term interest rates.
For the first time since September, the curve reversed temporarily on Tuesday. Given how Russia's invasion of Ukraine — and its economic consequences — continues to wreak havoc on the global economy, this shouldn't come as a surprise.
Treasury notes are effectively a loan to the United States government, and they are widely seen as a safe option for investors due to the low danger of the loan not being repaid.The Federal Reserve stated at its policy meeting earlier this month that it is considering as many as six more rate hikes in 2022 alone, given global uncertainties and tighter financial conditions. As a result, investors are turning away from riskier assets such as equities and toward safer investments such as Treasuries.
However, when more individuals rush to acquire bonds, the yield falls, making the investment less appealing. Some investors are even turning to assets like Bitcoin and cash, which have a lower track record of stability than bonds.Because an investor's money is committed for a longer period, a 10-year Treasury note normally pays a higher rate of return than shorter-term notes. Because risks are more predictable over a shorter time horizon, shorter-duration Treasury notes, such as a 2-year or 3-year bond, often have lower yields.
When the return on a 10-year note is lower than the return on a 2-year note, however, it suggests that investors are gloomy and unwilling to commit their funds. On Tuesday afternoon, the 10-year yield dropped to 2.383 percent, while the 2-year yield climbed to 2.387 percent, before the yield curve returned — only. The 10-year yield was 1.50 percent higher than the 2-year rate a year earlier.
According to research conducted by the Federal Reserve Bank of San Francisco, a yield curve inversion has preceded every recession since 1955.A stock market inversion does not necessarily imply that the market is ready to crash: While an inversion usually signals a recession within a year, it can take years. Despite the fact that the curve inverted in 2005, the Great Recession didn't begin until 2007. The most recent inversion, in 2019, sparked predictions of a recession, which did indeed occur in 2020, but only because of Covid-19.
Following the inversion, Patrick Harker, president of the Federal Reserve Bank of Philadelphia, told CNBC, "This is a pretty solid economy, minus the inflation data."
Nonetheless, some market participants are raising the red flag.
In a recent interview with CNBC, activist investor Carl Icahn stated, "I believe there very well might be a recession or even worse." "We've got a good hedge in place against long positions… I can't even foresee the short future."
Last week, Moody's Analytics chief economist Mark Zandi told CNN Business that the US economy has "at least" a one-in-three probability of going into recession in the next 12 months.
"The harder the Fed slams on the brakes, the more likely the car will break down and the economy will enter a slump," Zandi warned.Even so, the yield curve inversion on Tuesday was only a few minutes long. Inversions in the past lasted months. We'll have to wait and see if this was just a blip or the start of a bigger problem.
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