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You Should Be Paying Attention To The Warped Yield Curve

warp yield curve
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EDITOR'S NOTE: One alarming economic indicator you may be hearing about on the news is a warp in various yield curve sets. Whether it's the 2-year and the 10-year US Treasury or the 5-year and the 30-year bonds, the cost to borrow is higher in the short-term than it is in the long-term. In short, the yield curves are inverting once again. Inverted yield curves are rare, and when they do occur, they typically signal doom and gloom, meaning a recession is likely to take place. But some analysts argue this may not always be the case. Foreign investment in Treasuries may simply be creating a high and sustained level of demand for longer-term instruments. So, what do you think? The Axios article below explains several viewpoints in a clear and concise manner. Read on, and think for yourself.

Gyrating bond yields are warping the yield curve, an effect that’s becoming more pronounced, and its implications more confusing, Axios' Javier David reports.

  • Investors are bidding up shorter-dated interest rates more than longer-dated, a condition known as a flattening yield curve, which Matt warned last week is a recessionary bellwether.

Why it matters: Skyrocketing prices have turned the Federal Reserve into inflation firefighters, while geopolitics is pressuring longer term growth forecasts.

  • Investors are digesting so much that markets are getting indigestion — making it harder to cleanly decipher the yield curve’s messages.

What’s happening: Yesterday, the difference between the 2-year Treasury and its 10-year counterpart narrowed to its smallest since February 2020.

  • And the differential between 5-year notes and 30-year bonds actually inverted, which is when it costs the government more to borrow for the shorter period (in this case, five years) than for the longer term.

Between the lines: It's the first time the 5-year and 30-year have inverted since March 2006, Bleakley Advisory CIO Peter Boockvar wrote in a note to clients.

  • Boockvar contended that an economic "soft landing is wishful thinking," given surging inflation and supply chains that are still under pressure.

Yes, but: The relationship between an inverted yield curve and a possible downturn comes with a lag, economists say. And yield signals are being largely distorted by years of the Fed's aggressive easy money policies.

The bottom line: Today’s inverted curve doesn’t mean tomorrow’s recession, but it certainly bears close monitoring.

Originally published on Axios.

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