The market’s most closely watched part of the yield curve inverted today, and if its record over the last half-century is any indicator, the U.S. could be headed for a recession soon.
Concerns over a global slowdown, in addition to uncertainties from the U.S.-China trade war, have weighed heavily on longer-term U.S. Treasury yields. Since the new year, the return on the longer-term 30-year Treasury has fallen from a high of 3.12% in March to 2.08% on August 14. BAML points out that it can take between eight to 24 months for a recession to hit after the 2-year and 10-year curve inverts. They warned that an inverting yield curve means equities are on “borrowed time.”
Fed Chairman Jerome Powell has grappled with interpreting the yield curve over the past few months. In early July, Powell told Congress that bond markets “reflected the real concerns that arose really beginning in May,” referencing the slowdown in U.S. business investment and broader global concerns abroad.
Bond yields are driven by demand, and the more demand there is for a given bond, the lower the yield will be . When economic conditions deteriorate, investors may pour money into longer-term Treasuries due to concern over events that could transpire in the short-term. Thus, shorter-term Treasuries would offer a higher yield compared to the more desired longer-term bonds.
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