{"id":12106,"date":"2022-12-08T11:43:44","date_gmt":"2022-12-08T11:43:44","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12106"},"modified":"2022-12-08T11:43:45","modified_gmt":"2022-12-08T11:43:45","slug":"does-the-inverted-yield-curve-signal-a-recession-ahead","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/does-the-inverted-yield-curve-signal-a-recession-ahead\/","title":{"rendered":"Does the Inverted Yield Curve Signal a Recession Ahead?"},"content":{"rendered":"\n<p><em>Derrick O. from Idaho Falls, ID asks: <\/em>Hi Mitch, I saw an article last week about an \u201cextreme yield curve inversion,\u201d which is supposed to be a strong signal of a recession. Do you agree that this is the case? Thank you.<\/p>\n\n\n\n<p><strong>Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n<p>Thanks for emailing your question. The article you sent is accurate in reference to the yield curve inversion being larger than usual, which is true no matter your preferred measure of the yield curve.<\/p>\n\n\n\n<p>The financial media mostly focuses on the difference between the 2-year Treasury bond yield and the 10-year Treasury bond yield. When the 2-year yield goes above the 10-year yield \u2013 meaning investors get paid more yield over a shorter time frame \u2013 the curve is inverted. By that measure, and as of the end of last week, the 2-year was 0.78% higher than the 10-year, market the largest negative gap since late 1981. I think this is probably where the \u201cextreme\u201d characterization comes in.<sup>1<\/sup><\/p>\n\n\n\n<p><strong><u><a href=\"https:\/\/go.steadyinvestor.com\/recession-is-coming-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_recession_is_coming_zim_12_08_2022&amp;content=recession_is_coming\">How to Prepare for a Recession<\/a><\/u><\/strong><\/p>\n\n\n\n<p>What will happen to your investments if a recession occurs? A recession can impact investors in many different ways, but with foresight and planning, you may be able to avoid some of the damage a recession can cause.<\/p>\n\n\n\n<p>To help you plan for what\u2019s ahead, we are offering our recession guide, to help you understand the following \u2013<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Recession signals and indicators<strong><em><\/em><\/strong><\/li>\n\n\n\n<li>How recessions work<strong><em><\/em><\/strong><\/li>\n\n\n\n<li>How long recessions last<strong><em><\/em><\/strong><\/li>\n\n\n\n<li>How to potentially protect yourself and your family from long-term damage<strong><em><\/em><\/strong><\/li>\n<\/ul>\n\n\n\n<p><strong><u><br><\/u><\/strong>If you have $500,000 or more to invest, get our free guide. You\u2019ll learn the scope and impact of recessions, and get our viewpoint on the most important moves you can make to weather a potential one. Don\u2019t wait\u2014get this guide today!<br>\u00a0<br><strong><u><a href=\"https:\/\/go.steadyinvestor.com\/recession-is-coming-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_recession_is_coming_zim_12_08_2022&amp;content=recession_is_coming\">Download Your Copy Today:\u00a0<em>A Recession is Coming: 6 Insights to Know You\u2019re Prepared<\/em><\/a><\/u><\/strong><em><strong><a href=\"https:\/\/go.steadyinvestor.com\/recession-is-coming-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_recession_is_coming_zim_12_08_2022&amp;content=recession_is_coming\"><u><sup>2<\/sup><\/u><\/a><\/strong><\/em><\/p>\n\n\n\n<p>My preferred measure of the yield curve is also the one the Federal Reserve focuses on, which measures the difference between the 3-month U.S. Treasury bond yield and the 10-year U.S. Treasury bond yield. This measure of the yield curve is more meaningful, in my view, because it paints a clearer picture of net interest margins being earned by banks. Naturally, banks do not want to see short-term rates rise above long-term rates, because it crimps profitability on loans. That\u2019s also why a yield curve inversion is viewed as a negative for the economy.<\/p>\n\n\n\n<p>By my preferred yield curve measure, the curve is also inverted, but I would stop short of calling it \u201cextreme.\u201d As I write, the 3-month U.S. Treasury bond yields 4.34%, and the 10-year U.S. Treasury bond yields 3.51%.<sup>3<\/sup> There is historical evidence that this is a meaningful signal that a recession is either underway or nigh, as the chart below shows:<\/p>\n\n\n\n<p><strong>U.S. Yield Curve (10-Year U.S. Treasury Minus 3-Month)<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"395\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/12\/pic1-2-1024x395.png\" alt=\"\" class=\"wp-image-12107\" srcset=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/12\/pic1-2-1024x395.png 1024w, https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/12\/pic1-2-300x116.png 300w, https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/12\/pic1-2-768x296.png 768w, https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/12\/pic1-2.png 1168w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><figcaption class=\"wp-element-caption\"><strong><em>Source: Federal Reserve Bank of St. Louis<sup>4<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n<p>So, to answer your question, I think that a recession is indeed a very distinct possibility. But from an investment standpoint, as I\u2019ve written a few times before, I think stocks have already priced in future economic weakness with the bear market. I also think that the jobs market and consumer spending will buttress the economy as activity slows, such that the recession should be mild and perhaps not even noticed by many.<\/p>\n\n\n\n<p>Another possibility to consider is that the inverted yield curve may just be investors pricing-in a future with lower inflation, not an impending economic downturn. On one level, when longer-term Treasury bond yields are lower than short-term yields, it means investors think the fed-funds rate will be lower in the future than it is now \u2013 likely because the Fed will need to cut rates to revive a slowing economy. The market may be betting that inflation will be low enough next year to allow the Fed to take this action.<\/p>\n\n\n\n<p>There is no way to know exactly when or if a recession will occur, but you can prepare for one.<\/p>\n\n\n\n<p>It\u2019s important to understand how recessions work, how long they last, and how to potentially protect yourself and your family from long-term damage to your assets and security. We can help you with our free guide, <em><strong><a href=\"https:\/\/go.steadyinvestor.com\/recession-is-coming-guide?source=zim&amp;medium=blog&amp;term=mitchsmailbox_recession_is_coming_zim_12_08_2022&amp;content=recession_is_coming\">A Recession is Coming: 6 Insights to Know Now So You\u2019re Prepared<\/a><\/strong><\/em>.<sup>5<\/sup><\/p>\n\n\n\n<p>If you have $500,000 or more to invest, get our free guide today. You\u2019ll learn the scope and impact of recessions, and get our viewpoint on the most important moves you can make to weather this one. Don\u2019t wait\u2014get this guide today!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Yield curve inversion is generally a reliable predictor of a recession, but this time it could signal a mild recession\u2014or no recession at all<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-12106","post","type-post","status-publish","format-standard","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12106","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12106"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12106\/revisions"}],"predecessor-version":[{"id":12109,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12106\/revisions\/12109"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12106"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12106"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12106"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}