Flattening Treasury Yield Curve And Recession: This Time Is Different?

bond market photo

Photo by investmentzen

Economic theory has always held that an inverted U.S. treasury yield curve could be used as a reliable signal for a recession looming on the horizon. According to the Federal Reserve, however, this time is different!

This Time Is Different

“How different the position of the investor today!” was the headline for an ad that ran in The Saturday Evening Post* just one month prior to the 1929 stock market crash. Now while no one is calling for a stock market crash today, just how certain is the Fed that if the yield curve actually does invert a recession actually is not imminent?

The answer, of course, is not certain at all. The rationale for the flattening yield curve is that there is massive demand for U.S. Treasury’s due to the paucity in yields available from the long-end of bond markets around the world.

As an example, Spain, one of the EU PIIGS (Are The EU PIIGS About To Start Squealing?) that most weeks has another article written about the fragile condition of its banking system, sports a 2-year sovereign yield of -.254%.

This, while the Fed is hiking short-term rates and the long-end of the treasury market, is not following along (see chart below). Higher long yields would typically result when a hot economy fans the flame of inflation fears. And the thinking is that 2018 will see more than one Fed hike.

So is the flattening yield curve different this time due to a global supply, demand and yield level imbalance that has investors piling into the U.S. government debt market?

Time will tell, and while the treasury yield curve is not yet close to inverting, such an occurrence would be a very good sign that recession is coming.

Flattening Of The U.S. Treasury Yield Curve

Maturity 1/3/2017 12/28/2017

3 month .52% 1.27%
1-year .89% 1.62%
5-year 1.94% 2.13%
10-year 2.45% 2.37%
30-year 3.04% 2.76%