Inverted Yield curves have an odd and accurate way of predicting the R Word (What’s that, we rarely say this word out of optimism…… RECESSION!)
This post was actually started early last week, BEFORE a ton of headlines…. a quick google search of “Inverted Yield Curve” yielded the following….
Ok, so the word it out… but let’s go ahead and discuss….
Yields are a reflection of risk, so the longer the time, the greater the risk, the higher the yield “Should” be…
The Yield Curve is most notably the curve from normal times, lower left to upper right and is basically the yields (% interest rate) of the different time terms, such as 1,2,3,4 …10 year treasury…
There are all types of ways to measure, but one of the most accurate is the 2 years treasury against the 10 year treasury yield…
So by taking the 10 year yield and subtracting the 2 year yield, under normal times there will be a positive difference…. When the difference is negative, there is a problem as longer term risk/interest rates are lower than shorter, creating the inverted yield curve…..
2 year and 10 year Current Spread Update
1976 to present, grayed areas are R- Words
And a more blown up last year to date (had to update this chart too, as last week it had NOT inverted)
Not a deep inversion, but it has inverted…
Couple of important thoughts:
The R word is defined by two negative GDP prints in a row (no matter the depth i.e. could be -.01 and -.01)
While accurate in predicting (2-10 spread) timing is not, times vary from inversion after the R-Word has already started to multiple years…
Just as timing is a mystery, as mentioned above, depth of the R-Word from this mighty predictor is also variable…
We are watching, and you will certainly be seeing headlines!
Now you know!
Have a Great “R-Word Heads Up’ Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth