Market Briefing: US Yield Curve Yardeni Research, Inc. January 6, 2021 Dr. Edward Yardeni 516-972-7683 eyardeni@yardeni.com Debbie Johnson 480-664-1333 djohnson@yardeni.com Mali Quintana 480-664-1333 aquintana@yardeni.com Please visit our sites at It seems that many prognosticators believe that an inversion is a clear market signal that a recession is soon to follow, and stock investors should be concerned. However, the yield curve inverted in March 2019 when long-term bonds had lower yields than short-term bonds, which has historically occurred before each of the last five U.S. recessions. A Historical Look at Yield Curve Inversions and Equities March 28, 2019 Ian McMillan Earlier this week, both Greg Schnell and Andrew Thrasher gave us their insight on past yield curve inversions, what occurred in equities markets following said inversions, and how we might be able to use this info to navigate the current environment. The yield curve’s forecasting record since 1968 has been perfect: not only has each inversion been followed by a recession, but no recession has occurred in the absence of a prior yield-curve inversion. I don't know of any economists who dispute this assertion; history is history and not theory. It’s a graph that could mean the difference between a thriving bull market or the downswing of a bear market. CNN Business' Julia Chatterley explains what an inverted yield curve is, and its eerily-accurate history of predicting recessions. Earlier Wednesday, the yield on the benchmark 10-year Treasury note was at 1.623%, below the 2-year yield at 1.634%. The stock market declined 3% on August 14, 2019 because of the prospect that the yield curve was close to inverting between the 2-year note and the 10-year bond. The inversion of a widely watched part of the US Treasury yield curve last week has rattled markets already nervous about slowing global growth. There is a significant lag between the first inversion date and the onset of the recession. Archive yield curve data are available by close of business of the second working day of a month, for example, data for the 31/12/10 will be published by close of business 05/01/11. A yield-curve inversion is among the most consistent recession indicators, but other metrics can support it or give a better sense of how intense, long, or far-reaching a recession will be. Yield Curve as a Stock Market Predictor NOTE: In our opinion, the CrystalBull Macroeconomic Indicator is a much more accurate indicator than using the Yield Curve to time the stock market. Sometimes, such as in March of 2019, the yield curve “inverts” – meaning some of the shorter-term bonds have higher yields than some of the longer-term bonds – causing at least a partial downward slope (see blue line in the chart to the right, representing the The yield curve inverted at [a] and was followed by a sharp fall in the S&P 500. A yield curve inversion is a bearish signal that occurs when shorter duration Treasury notes offer a higher yield than longer duration notes. The inverted yield curve is a graph that shows that younger treasury bond yields are yielding more interest than older ones. Latest Data Background and Resources Archives Background: The yield curve—which measures the spread between the yields on short- and long-term maturity bonds—is often used to predict recessions. While various economic or market commentators may focus on different parts of the yield curve, any inversion of the yield curve tells the same story: An expectation of weaker growth in the future. … And it’s TERRIFYING for financial pundits all over the world. In March, inversion of the yield curve hit 3-month T-bills for the first time in about 12 years when the yield on 10-year notes US10YT=RR dropped below those for 3-month securities. And we use our growth-at-risk framework to analyze the potential impact of the recent yield curve inversion on future real GDP growth. Chart 1: Yield curve (spread between US 10-year and 3-month Treasuries, daily numbers, in %) in 2019. The past three recessions occurred within a year after the yield curve rebounded from an inversion. The so-called yield curve inversion sent ripples through financial markets, spurring a near 3% drop in the S&P 500 while safe-haven currencies surged. UPDATE August 15, 2019 As of August 7, 2019, the yield curve was clearly in inversion in several factors. It is clear, then, that yield curve inversion is a more useful signal of oncoming recession in some countries than in others, though it is usually at least somewhat useful. As shown in the chart below (based on data from August 27, 2019), the yield curve was inverted as short-term interest rates (1 and 2 month maturity) were higher than the … Others say an inversion of the yield curve reflects when the bond-market is expecting the U.S. central bank to set off on an extended easing cycle. We can see that this was the case on August 24, 2000 in the yield curve chart above. This development has spurred a debate about how investors should react to a yield curve inversion. This chart shows the Yield Curve (the difference between the 30 Year Treasury Bond and 3 Month Treasury Bill rates), in relation to the S&P 500. The above chart compares the S&P 500 index to the yield on 10-Year T-Notes and the Yield Differential (between 10-Year T-Notes and 13-Week T-Bills). This chart shows that when the curve inverts, a recession is very likely to follow several months later. The current yield curve inversion may mean a recession is coming, but should not be a signal for equity investors to panic. Indeed, the inverted yield. The inversion of the yield curve is of crucial importance as it has historically been one of the most reliable recessionary gauges. Inversion of the yield curve is worrisome when interest rates across the entire curve are rising as a result of an overheated economy. The chart below shows a baseline distribution of one-year-ahead real GDP growth (the blue line) that includes the latest quarterly real GDP growth (as well as an estimated trend), using data beginning in 1975. Latest yield curve data Yield curve terminology and concepts Commercial bank When people talk about “the yield curve inversion,” they usually refer to the 10y-2y segment; the curve is considered inverted when the 10-year yield is lower than the 2-year yield. It has preceded every recession in recent history. The negative spread in 2007 predicted a 40% chance of an imminent recession in a year. The 10-year minus 2-year Treasury (constant maturity) yields: Positive values may imply future growth, negative values may imply economic downturns. Historically, when the yield on the 10-year bond has dipped below the yield on the 2-year bond, the inversion of … If 2019 was the year the yield curve went mainstream, with an inversion sending a stark recession warning, then 2020 is already shaping up as a welcome return to normality. PnF analysis indicates that bond prices are set to rise for awhile (thus IR will be falling). “#TrumpRecession” was trending on Twitter. Lately, there has been quite a bit of hand-wringing by the financial media about the yield curve inversion. That does not appear to be the case at this time. Current yield curve is of crucial importance as it has historically been one the! Appear to be the case at this time by a sharp fall in the yield curve inversion mean! 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