In these notes, we reward those of you who have been clamoring for more on the yield curve. Ok, that’s a lame attempt at economic humor - it’s entirely possible that no one has ever clamored for more on the yield curve. But the yield curve is back in the news and is quite important to understanding financial markets and potentially recessions, so we dig into it again. Since reading about the yield curve can be a slog, in a word, we’ll reward our readers by taking a break from talking about China and trade. The news on that topic tends to go up and down by the week, and I expect that we’ll return to it soon as it’s a market mover.
- Back to the Yield Curve Future: An inverted yield curve, meaning that short term interest rates have moved higher than long term rates, has been a reasonably reliable predictor of a coming recession. Within the last week, the 2 Year Note yield edged higher than the 5 Year Note yield, causing some consternation. As I write this, the yield on a 2 Year Treasury Note is the same as the yield on a 5 Year Treasury Note at 2.77%. We believe, however, that the appropriate yield curve comparison is the 3 Month Treasury Bill rate at @2.4% to the 10 Year Treasury yield at @2.9%, still a healthy positive slope. This San Francisco Federal Reserve Bank paper explains why.