U.S. 2-year and 10-year Treasury yieldThe recent inversion of the curve is a sign that the recession indicator has flashed a warning signal. At the time of the debate, Duke University professor Campbell Harvey, known as the “father of the yield curve indicator”, said that the inversion is only meaningful for a quarter. It means that the recession warning signal has not yet appeared.
Short-dated U.S. Treasury yields exceed long-dated U.S. Treasury yields, known as a yield curve inversion, which typically predicts a recession in the next 20 months. Among the years, whether the 2-year and 10-year yield curves are inverted is the most eye-catching.
Harvey first used the yield curve as a recession indicator in his 1986 paper. He said on Friday that the inversion of the yield curve needs to be maintained for a quarter, and that it does not make sense to have only a day or a week. So he believes that while the U.S. economy looks set to cool, it’s too early to tell that a recession is imminent.
The 63-year-old economist said the spread between short- and long-dated bonds has been narrowing in recent months, and the flattening of the yield curve between maturities given the Fed’s tightening cycle As can be expected, a flattening of the yield curve suggests a slowdown in U.S. economic growth.
Looking back on history, the yield spread usually waits for the Fed to raise interest rates for a period of time before it tends to zero, but this time the Fed took the first shot of raising interest rates. The interest rate spread in the future has narrowed rapidly at a rate not seen so far in 1980, before the Fed raised interest rates on March 16. The 10-year minus 2-year spread turned negative on March 29, the first inversion so far in August 2019, and has remained inverted for a few days since then.
Gargi Chaudhuri, head of U.S. investment strategy at BlackRock iShares, argues that there is no near-term recession. However, many observers believe the Fed may have fallen far behind on inflation, such as former U.S. Treasury Secretary Lawrence Summers said on Friday that a consensus among economists that the U.S. economy will fall into recession within a few years is taking shape.
3M/10Y U.S. Treasury Yield Curve
Like Fed Chairman Powell, Harvey prefers to use the yield rate at the shortest end of the bond market as a benchmark, that is, the 3-month period compared to the 10-year period, and the current U.S. 3-month Treasury bond yields not only Still below the 10-year, spreads are even more than 200 basis points, and the curve is still steep.
But Harvey cautioned that the yield curve for 3-month and 10-year Treasuries might flatten significantly within a year.
Both the 3-month/10-year and 2-year/10-year yield curves have inverted before the U.S. economy fell into recession in 2020.
Three-month Treasury yields are currently around 0.68%, reflecting only the Fed’s already materialized rate hikes, while two-year yields around 2.5% reflect expectations of future rate hikes.
