Yield Curve Inverts Flashing Recession Warning; Stocks Plunge

The yield on the 10-year Treasury fell below the yield on the 2-year for the first time in 12 years, stoking recession fears and tanking stock markets.

Yield curve inversions have preceded all nine recessions since 1955.  This was the first time the 10-year Treasury yield has dropped below the 2-year yield since June 2007 – the cusp of the Great Recession.

We saw other yield curves invert earlier in the year. In March, the yield on 10-year Treasurys fell below the yield on 3-year bonds for the first time since 2007, and global bond yields actually inverted last summer. At the time, the Financial Times called a yield curve inversion “Coco Chanel’s proverbial ‘little black dress’ of economic indicators.”

The slope made up of bond yields of various maturities has a record of predicting recessions that would make even the savviest econometrician turn pea-green with envy. It is not perfect, but the curve has become flat and inverted — when short-term bond yields are actually higher than long-term ones — ahead of most economic downturns in most major countries since the second world war.”

The Dow Jones had its worst day of the year Wednesday, falling 800 points after the inversion.  The S&P 500 also fell nearly 3% on the day. Gold was up about $14.

According to the New York Times, yield curve inversions have accurately predicted all nine economic recessions since 1955. There was one false positive in the mid-1960s when an inversion was followed by an economic slowdown that did not dip into a recession.

In general, investors demand a higher rate of return for locking their money up in long-term bonds and yield curves normally slope upward. The rate of return on a 2-year bond will typically be less than the return on a 10-year bond. During economic expansions, inflation expectations tend to rise. As a result, investors demand even higher yields for long-term bonds to offset this effect. A sharply upward-sloping yield curve generally means investors have optimistic expectations for the future. But during recessions, inflation tends to fall. That puts downward pressure on long-term yields. The difference between long-term and short-term yields flattens and eventually inverts.

Duke University finance professor Campbell Harvey told NPR yield curve inversions are “almost always bad news.”

My indicator has successfully predicted four of the last four recessions, including a pretty important call before the global financial crisis.”

And yet many mainstream pundits remain optimistic. They say the yield will have to remain inverted for an extended period before they worry about a recession. One trader told Reuters this “certainty” isn’t a sign of an impending recession.

The yield on the 30-year Treasury also dropped to a record low of 2.015% Wednesday. One analyst told Reuters this indicates that the Fed is sitting between a rock and a hard place.

This latest move on the long end of the US curve is sending the Fed a clear message: the notion of a slow, methodical ‘mid-cycle adjustment’ is very much in question, and at the same time so is the efficacy of lower rates to solve the issues at hand.”

Peter Schiff has said that long-term yields will eventually begin to go up when the mainstream finally realizes we are heading toward an inflationary recession. He said he thinks the long end is going to be rising because of higher inflation and because of waning demand for US Treasurys in the face of exploding supply, especially when we move into recession.

Peter has been predicting a recession for months. Back in January, Peter called a recession “a done deal,” even as the Federal Reserve pivoted back toward an easy-money policy to rescue the stock market.

Of course, stock market investors are clueless about that. They’re just having a party because the Powell Put is back on the table. And they think simply because the Federal Reserve is no longer hiking rates that they no longer have to worry about the Fed pushing the economy into a recession. Well, it’s too late for that. The rate hikes of the past have already guaranteed that the economy is headed for recession. It doesn’t matter whether they continue to raise rates in the future. The recession is a done deal. It’s just now you have that calm between the storm while investors are still clueless and haven’t yet connected those, what should be, very obvious dots.”

Just last week, Peter reiterated that a recession is on the horizon and the Fed is going to continue to cut rates when he appeared on Fox Business with Liz Claman.

The Fed’s going to cut. Look at the horrible manufacturing data that came out today, the weak construction data. The US economy is going to recession and it’s headed there fast, and so the Fed is going to go down.”