The yield on the two-year and 10-year Treasurys inverted for the first time in over a year on Thursday, raising the possibility of a recession.
The rate of the 2-year note is higher than the 10-year note because of the bond market phenomenon.
This part of the yield curve is watched closely by investors because they believe that the economy could be headed for a downturn. The 2-year to 10-year spread was negative for the first time in 2019.
The yield on the 10-year Treasury fell to 2.331%, while the yield on the 2-year Treasury was at 2.337% at one point. Both yields were basically at the 2.34% level in the latest trading.
The spread can be monitored in real time.
There has been a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of one in the next two years.
CNBC data did not confirm the inverted 2-10 spread until now, but some data providers showed it for a few seconds earlier Tuesday. Many economists believe that the curve needs to stay inverted for a long time before it gives a signal.
Think about what the yield curve means for a bank when looking at the importance of the yield curve. The yield curve is a measure of the spread between a bank's cost of money and what it will make by lending it out or investing it over a longer period of time. Economic activity slows if banks can't make money.
While the yield curve is reliable in sending signals about pending recessions, there is often a long time lag before investors need to fear a recession is around the corner.
Some of the other signals could include a sudden increase in unemployment, or early warnings in ISM that manufacturing activity could be slowing. The yield curve could reverse if the Federal Reserve paused in its rate-hiking cycle or if there was a resolution to the war in Ukraine.
The yield curve inverted 423 days before the 2001 recession, 571 days before the 2007-to-2009 recession and 163 days before the 2020 recession.
Most of the time, a recession is a sign, but not all of the time, according to the head of equity, derivatives and quantitative strategy at Evercore ISI. He noted that the economy avoided a recession in 1998 when the Russian debt crisis and Long Term Capital Management failed.
The last 30 years has been a good one, with few recessions that you don't want to say something is a golden rule.
The stock market continued to perform well after six instances where the 2-year and 10-year yields inverted. The S&P 500 was up an average of 1.6% a month after the inversions but was up an average of 13.3% a year later.
The stock market does not peak until between two and 12 months prior to the start of a recession, but in most cases there is a recession over the long haul.
There is a 25% chance of a recession in the U.S.
The yield curve is not as reliable as it used to be because the Federal Reserve has become a big player in the market, according to some bond pros. The 10-year note and 30-year bond should be higher because strategists believe the Fed has suppressed interest rates at the long end.
The 10-year yield could be closer to 4% if the Fed hadn't done quantitative easing. The yield curve for the 2-year and the 10-year would be 100 basis points apart if it weren't for the central bank's bond-buying program. The basis point is 0.01%.
The part of the curve most reflective of Fed rate hikes is where the 2-year yield has climbed most rapidly. The 10-year has been held back by flight-to-quality trades as investors keep an eye on the Ukraine war. The yields move in opposite directions.
The 3-month yield to the 10-year yield is thought to be a more accurate recession forecaster by some market pros. The widening of that spread is a sign of better economic growth.
All Rights Reserved © 2024
