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
Bond Market Beats its Chest … Invertedly/Upside Down Yield Curve …. R – Word Predictor (Recession)
Some on Wall Street say the Bond Market is the smartest due to the fact that participants are only focused on repayment risk and time of that repayment. Compared to the Equity (Stocks) market were there are flows of capital, tons of complication with financials and mood swings by participants.
Given the Bond Markets high IQ status, when it speaks people listen….
Inverted Yield Curve as Bond Market Beats it Chest with a Warning
As a quick refresher, a normal yield curve will have lower rates for shorter terms and higher rates for longer…. simply because the longer the term the greater chance of a problem/stress/default …
Pardon my free hand, but it looks like this… the longer the time the greater the cost/interest rate
When the Bond Market turns upside down/inverts, it has a very good track record of predicting a R- Word!
Note on this long term chart, as the line drops below zero, the Bond Market is Beating its chest and inverting…. also note the grey area that follow are R-Words…
Using a shorter term chart, last week marked a strong inversion of about -.25% and closed the week off at -.20% note those are point 25% and point 20%…. far right below the line…
So it looks like the R Word is in the cards, not to worry we have been talking slowdown since December of 2021… so we are prepared….
Remember, Equity Markets are forward looking and will sniff out the recovery before it is seen…. Also, recall, headlines are the worst near the end…. Still a Ways to Go though!
Next up — Why the Fed is in a pickle and may only have an R- Word way out!
Have a Great “Inverted Yield Curve” Update Day!
John A. Kvale CFA, CFP
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Posted in Clients/Clients Only, Economy, FOMC, Forecast, Interest Rates, Investing/Financial Planning, Market Comments
Tagged 10 Year Treasury, 2 Year Treasury, 2-10's, FOMC, Interest Rates, Inverted, Yield Curve