We don’t spend a lot of time here on the site analyzing the global macroeconomy. But given the amount of (virtual) ink spelled today, and over the past few weeks, about the increasingly inverted US yield curve we thought it was worth a post. The US yield curve hasn’t been fully inverted for well over a decade, so yeah it is noteworthy.*
Instead of pointing you to an excerpt from my book on the slope of the yield curve, you can find below you some select quotes from people smarter than me on the subject.
“The yield curve reflects investors’ beliefs about economic risks. That said, I believe this time may be different. The yield curve is constantly in the news. The number of internet searches for “yield curve” has spiked, raising the possibility of a self-fulfilling prophesy. That is, the awareness that a yield curve inversion has preceded each of the last seven recessions causes people to change their behavior.” – Prof. Campbell Harvey (LinkedIn)
“There are reasons to be concerned. The global economy is slowing. The US economy has slowed. Current policy (especially on trade) is a drag on growth. But I wouldn’t freak out about the yield curve.” – Bill McBride (Calculated Risk)
“A yield curve inversion does not mean that a recession is on top of us or that it couldn’t be averted. It does mean that the risks of recession are higher. The Fed will cut 25bp in September with a risk of 50bp. Obviously if credit markets seize up before then we will be looking at the possibility of an inter-meeting cut. A lot of chaos is flowing from the White House now and fostering a negative feedback loop where red days on Wall Street increase Trump’s anger at Powell. The results could become unpleasant.” – Prof. Tim Duy (Tim Duy’s Fed Watch)
“I also find myself in the unusual spot telling people to relax a bit. A 2/10 inversion is not a good thing, but it’s not exactly a tripwire. Historically, inversions precede recessions by as long as two years. We had an inversion in the late 1990s when the economy was doing very well.” – Eddy Elfenbein (Crossing Wall Street)
Bottom line: The inverted yield curve is noteworthy. But the yield curve isn’t an on/off switch for the US economy as a whole. The US economy could very well fall into a recession, but that is still off down the road. If a recession does occur it will be for a host of reasons, including political chaos. The yield curve would be factor, but not THE overriding factor.
*See below Josh Brown and Michael Batnick with their take on the inverted yield curve.