Recession Watch: Yield Curve Essentially Inverted Already
Jesse Felder | May 18, 2016 06:13AM ET
Jeff Snider wrote a fascinating post on the yield curve and its usefulness as an economic indicator. Many have suggested recently that we won’t see a recession without first seeing the yield curve invert.
Jeff contracts this idea by suggesting that, due to increasingly aggressive monetary policy over the past several decades, its the relative change in the yield curve, not the absolute change that should be measured in this regard:
In past cycles an inverted curve has appeared months before the onset of recession, so the fact that there is still positive spread in the calendar maturities is being taken as if credit is suggesting still some hope for avoiding it… The incidence of the steeper yield curve is itself a reflection of monetary degradation. The FOMC targeted lower and lower rates for the front end which UST bill rates “obliged.” The back end of the curve was relatively apathetic, which had the effect of steepening the curve far beyond the historical range. While a steeper curve is supposed to reflect better long run economic prospects, that was never the case. Instead, that numerically sharper curve only suggested the increasing inefficiency of monetary policy… So the narrow focus on the +95 bps spread remaining in the 2s10s part of the curve misses the economic slowing and drastic risks that the prior 150 bps of already completed flattening has been proved right about. It is not the absolute level of the curve that has been useful in determining the slowdown condition (or the appearance of slowdown itself) but rather the relative changes and flattening all throughout this “cycle.”
Looking at the chart at the top of this post, it’s pretty clear we have now reached the effective “lower bound” for the yield curve.
If he’s right, this is a pretty clear recessionary warning. And if that chart looks familiar, that’s because even long-time Fed insiders are now speaking out about the massive distortion of asset prices Jeff refers to that has been a direct result of super-aggressive monetary policy.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.