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𝘿𝙚𝙖𝙧 𝙘𝙤𝙢𝙢𝙪𝙣𝙞𝙩𝙮

The Yield Curve Inversion Is The Deepest Since 1980s - This Is A Big Deal🚨

𝗪𝗵𝘆 𝗮𝗿𝗲 𝘁𝗵𝗲𝘆 𝗶𝗺𝗽𝗼𝗿𝘁𝗮𝗻𝘁?

Yield curve inversions have, historically, been one of the best recession forecasting tools we have. It has correctly predicted recessions for the last 50 years, the timing of that recession, however, can range anywhere from 5-24 months.

𝗧𝗵𝗶𝘀 𝗽𝗮𝗿𝘁𝗶𝗰𝘂𝗹𝗮𝗿 𝘆𝗶𝗲𝗹𝗱 𝗰𝘂𝗿𝘃𝗲, 𝗵𝗼𝘄𝗲𝘃𝗲𝗿, 𝗵𝗮𝘀 𝗻𝗼𝘄 𝗯𝗲𝗲𝗻 𝗶𝗻𝘃𝗲𝗿𝘁𝗲𝗱 𝗳𝗼𝗿 𝗺𝗮𝗻𝘆 𝗺𝗼𝗻𝘁𝗵𝘀 𝗮𝗹𝗿𝗲𝗮𝗱𝘆.🔥🔥🔥

What’s striking is that the current spread between the 10-year yield and 2-year yield (-70bps) is now greater than what we experienced before the dot com bubble and the global financial crisis.

This indicator is important because the Fed monitors it, this consequently shapes their outlook on monetary policy.

𝗪𝗵𝗮𝘁 𝗱𝗼𝗲𝘀 𝗮 𝗻𝗼𝗿𝗺𝗮𝗹 𝘆𝗶𝗲𝗹𝗱 𝗰𝘂𝗿𝘃𝗲 𝗹𝗼𝗼𝗸 𝗹𝗶𝗸𝗲 𝗮𝗻𝗱 𝘄𝗵𝘆?

Normally, longer duration bonds have higher yields than short-duration bonds, and the yield curve slopes upward to the right. A 'healthy' yield curve. This occurs when investors are optimistic about the prospects for longer-term growth and inflation of the economy.

Buyers tend to demand higher yields in order to lend their money over longer durations as they need to be compensated for the added risk for things like inflation, uncertainty and credit risk eroding cash flows.

𝗛𝗼𝘄 𝗱𝗼𝗲𝘀 𝗶𝘁 𝗶𝗻𝘃𝗲𝗿𝘁 𝗮𝗻𝗱 𝘄𝗵𝗮𝘁 𝗱𝗼𝗲𝘀 𝗶𝘁 𝘀𝗶𝗴𝗻𝗮𝗹?

When the yield curve flattens or inverts, it signals that the market thinks the Fed is tightening monetary policy too aggressively.

When this happens, markets price in lower growth and lower inflation in the long run which, brings down yields on longer duration bonds.

That causes an inversion like we see right now.

𝗪𝗵𝗮𝘁’𝘀 𝗻𝗲𝘅𝘁?

The Fed has already raised an eye-watering 3.75% this year, 𝘁𝗵𝗲 𝗺𝗼𝘀𝘁 𝗮𝗴𝗴𝗿𝗲𝘀𝘀𝗶𝘃𝗲 𝗵𝗶𝗸𝗶𝗻𝗴 𝗰𝘆𝗰𝗹𝗲 𝗶𝗻 𝗺𝗼𝗻𝗲𝘁𝗮𝗿𝘆 𝗵𝗶𝘀𝘁𝗼𝗿𝘆. This has heavily influenced the short-end of the curve, moving yields up. With inflation still at multi-decade highs, the market is pricing in terminal rates of 5% next year, that means 1.25% or 5 hikes still to come before we see the peak.