To The Moon

The widely tracked U.S. 2-year/10-year Treasury yield curve briefly inverted on Tuesday for the first time since September 2019,

Every U.S. 2s/10s Treasury yield curve inverts in history has signaled a recession.

However, every time the economist explained, " it is different than previous".

Below are how Fed experts explain "it is different than previous" after the U.S. Treasury yield curve inverted over the past three decades:

1. The 1990 Recession | Greenspan

Greenspan, former FED chairman, February 1989 commented: I take great comfort in the yield curve and what it says about the Fed's credit. What does it look forward to? What does it tell us about the future? I'm not sure if this is really the case. The yield curve in the U.S. and elsewhere is not a reliable indicator of future inflation, and most recessions are caused by inflation. I wouldn't bet on it like that. So I don't think an inverted yield curve is telling us anything important.

2) Recession of 2000 | Greenspan

In February 2000, the Fed's Green Paper blamed the inversion of the yield curve on "technical factors related to Treasury repurchase programs and other related expectations of changes in the relative supply of bonds." Treasury Secretary Larry Summers announced $3 billion in U.S. Treasury repurchases before the inversion.

The Fed noted that there are two views in the market: one that sees the inversion as a temporary phenomenon, the anticipation curve. Once the Fed begins to tighten monetary policy in the first quarter, the yield curve steepens again. Another view is that the inversion will continue, reflecting slower economic activity as the Fed tightens and institutional selling increases.

In March, the Green Paper continued to see a bond supply issue, citing the Congressional Budget Office's forecast for a cut in U.S. Treasury issuance. The Fed's Open Market Committee will have to tighten monetary policy more aggressively to force higher yields and repress equities. The FOMC also discussed strong demand for long-term bonds from domestic and foreign portfolio accounts. But Treasury issuance is too low relative to demand, and government budget surpluses will further reduce bond supply.

In October 2000, the FOMC called the inversion a "supply problem."

In November 2000, the FOMC stated that "the short end of the yield curve has collapsed, clearly reflecting market expectations for easing".

* In the end, U.S. stocks fell about 50% from peak to trough.

3) The Recession of 2007 | Bernanke

On March 6, 2007, Bernanke gave a speech entitled "Rethinking the Yield Curve". He argues that the decline in yields can be attributed to the decline in term premiums, reflecting the "Great Moderation Period" and the effectiveness of monetary policy. Some Asian countries have intervened in exchange rate markets, pouring most of their dollar reserves into U.S. Treasuries, depreciating the dollar. At the same time, supply from the Treasury has not kept pace with demand from pension funds, among others.

On March 6, the minutes of the FOMC meeting showed that although Bernanke delivered a speech, the market was divided on the reasons for the inversion of the yield curve.

On September 6, the FOMC believed that the inverted yield curve in 2000 was a signal, and in retrospect, the Fed probably should have responded at that time. Reinhart Reinhart points out: This metric now seems less convincing for two reasons. The yield curve has made mistakes over the years, including a recession that didn't follow after it inverted in the mid-1990s. Second, the decline in yields may be due to reduced uncertainty rather than a sign of heightened economic vulnerability.

Plosser also points out that the predictive power of a change in the curve's slope depends on the cause of the yield curve change. Half of this is due to the term premium, which has less predictive power for recessions. Miskin said, “I have done some research on how the yield curve changes during recessions. I don’t think the yield curve is very informative. There is a specific reason for the inversion, which is the flattening of the term premium.

* In the end, U.S. stocks fell about 50% from peak to trough.

4）Twice inverts in 2018 and 2019. 2020 COVID-19 Recession | Yellen, Powell

In December 2017, Yellen said, "There is good reason to believe that the relationship between the yield curve and the business cycle has changed.

On June 1, 2018, Powell noted. Term premiums have always been low, so some argue that yield curve flattening is a matter of calculation. What's more important is the neutral rate level, and long-term yields seem to be telling us where the neutral rate should be.

* In 2018, US stocks fell 25% from peak to trough; in 2020, US stocks fell about 40% from peak to trough.