Inverted yield curves: What the headlines miss
WEEKLY MARKET COMMENTARY |
Recent investor headlines have focused heavily on the inversion of the U.S. yield curve. The yield on the 10-year Treasury briefly fell below that of the two-year Treasury in mid-August, ostensibly prompted by global economic fallout from trade battles between the U.S. and China. (Note, the 10-year has been below the Federal Reserve funds rate and 30-day rate since May 2019.)
Such inversions are often viewed as a harbinger of impending recession. However, we believe the cause and effect is not as strong nor as immediate as headlines would suggest.
Certainly, there is a real economic relationship between interest rate curves and business cycles. Such inversions signal investors are worried about prospects for economic growth and see little impetus for inflationary pressures (and may even be worried about deflation).