1. Historical perspective | The 1-year/10-year yield curve spread inverted on average some 14 months before the onset of the past nine recessions, dating to the 1950s. (Photo: Shutterstock)
2. Exceptions | Not all yield curve inversions since the 1950s led to a recession. For instance, the 3-month/10-year yield curve inverted in 1966 and again in 1998, but neither inversion resulted in an immediate recession. (Photo: Shutterstock)
3. Inversion/steepening | The shorter end of the yield curve has inverted, but the longer end is actually steepening. The 10-year/30-year yield curve, for example, has steepened most of this year. In past recessions, all parts of the curve inverted before a recession took place. (Photo: Shutterstock)
4. Not so tight | Financial conditions aren’t tight; historically, tight conditions coupled with a yield curve inversion has resulted in a recession. Investment-grade corporate and high yield spreads remain calm, suggesting that some parts of the bond market remain unworried about an impending recession. (Photo: Shutterstock)
5. Fed rate cut | Market participants have fully priced in a Federal Reserve rate cut within the next year, potentially further flattening the curve. If the economy should gain steam during the second half (a prospect LPL considers possible), it will likely avoid a Fed rate cut, which should lead to a steeper yield curve. (Photo: Shutterstock)
6. Predictive spread | LPL has found that a spread between the 3-month/10-year yields has become much more predictive of a recession at -50 basis points (-0.50%). This remains a real concern, LPL says, but a marginal inversion may not be so worrisome. (Photo: Shutterstock)
7. Imperfect indicator | Yield curves aren’t always perfect. Take Japan, which has had long stretches of inverted curves that didn’t lead to recessions. And the U.K. and Germany, both of which have had inversions without recessions. (Photo: Shutterstock)
8. Fed funds rate | The federal funds rate has been significantly higher during previous inversions, averaging more than 6% when the 1-year/10-year yield curve has inverted. At present, it is only 2.4%. (Photo: Shutterstock)
9. Post-inversion stock performance | The last five recessions began an average of 21 months after the 2-year/10-year yield curve inverted. Stocks initially performed well after these inversions; the S&P 500 Index didn’t top out until more than a year after the inversions, and gained nearly 22% on average at the peak. (Photo: Shutterstock)
10. Sinking global yield | Some $10 trillion in global debt is currently yielding less than 0%. The German 10-year Bund, for instance, is beneath 0% for the first time since 2016. LPL suggests that concern over the European slowdown has forced many to look to the U.S. as a safe haven for sovereign debt, thus pushing our yields much lower along the way. (Photo: Shutterstock)
11. S&P outperforms | The S&P 500 Index has outperformed the average year the previous three times the 2-year/10-year yield curve inverted — which hasn’t happened yet. (Photo: Shutterstock)
The yield curve has finally inverted. On March 22, the shorter end of the curve inverted, as the 3-month Treasury bill (and 1-year T-bill) yielded more than the 10-year Treasury for the first time since 2007.
This matters, according to LPL Financial Research, because an inverted yield curve is the bond market’s indication that a potential recession is in the offing.
On Friday, the curve flipped again, with the 3-month and 1-year T-bills both yielding 2.40% as the 10-year yielded 2.41%.
“The yield curve inversion is something that nearly everyone is talking about, given its perfect track record at predicting recessions,” LPL senior market strategist Ryan Detrick, said in a statement.
“At the same time, however, we simply aren’t seeing other areas of the economy that would confirm a recession just yet, so there is more to this story.”
LPL points out that no one true “yield curve” exists. The yield curve simply looks at the yields of a shorter-dated fixed income instrument, and compares it to a longer-dated one.
Moreover, the more commonly discussed 2-year/10-year yield curve spread has not inverted; it is above early December lows.
According to LPL, an inversion on part of the yield curve may suggest trouble ahead for the economy, but economic growth and potential stock market gains can continue for years after the initial inversion.
Given that credit markets are holding up well, employment remains strong and wages are still increasing, LPL says it does not yet see the necessary combination of worries that could suggest an imminent recession.
Check out the gallery for 11 things about the yield curve LPL says are worth considering.
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