{"id":213488,"date":"2024-03-15T00:57:48","date_gmt":"2024-03-15T00:57:48","guid":{"rendered":"https:\/\/michigandigitalnews.com\/index.php\/2024\/03\/15\/inverted-yield-curve-no-longer-reliable-recession-flag-strategists-say\/"},"modified":"2025-06-25T17:20:37","modified_gmt":"2025-06-25T17:20:37","slug":"inverted-yield-curve-no-longer-reliable-recession-flag-strategists-say","status":"publish","type":"post","link":"https:\/\/michigandigitalnews.com\/index.php\/2024\/03\/15\/inverted-yield-curve-no-longer-reliable-recession-flag-strategists-say\/","title":{"rendered":"\u201cInverted yield curve no longer reliable recession flag, strategists say\u201d"},"content":{"rendered":"

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That\u2019s the title of an article by S. Ganguly for Reuters<\/a>.<\/p>\n

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Nearly two-thirds of strategists in a March 6-12 Reuters poll of bond market experts, 22 of 34, said the yield curve\u2019s predictive power is not what it once was.<\/p>\n<\/blockquote>\n

Here\u2019s a picture of spreads, up to March 14th.<\/p>\n

\"\"<\/a><\/p>\n

Figure 1:<\/strong> 10 year minus 3 month Treasury spread (blue), 10 year minus 2 year (tan), both in %. March for data through 3\/14. Source: Treasury via FRED, and author\u2019s calculations.<\/em><\/p>\n

For comparison\u2019s sake, note that the Great Recession was preceded by an inversion that started a year and a half before the NBER defined peak.<\/p>\n

\"\"<\/a><\/p>\n

Figure 2:<\/strong> 10 year minus 3 month Treasury spread (blue), 10 year minus 2 year (tan), both in %. NBER defined peak-to-trough recession dates shaded gray. Source: Treasury via FRED, NBER, and author\u2019s calculations.<\/em><\/p>\n

We are currently about a year and a half from when the 10yr-2yr spread went negative, So I would say it\u2019s still too early to say we\u2019re safe, despite the apparent strength of the economy right now (well, as of February\u2019s data).<\/p>\n

Why do some economists discount the inversion\u2019s predictive power this time around?<\/p>\n

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\u201cIf you have these two things going on together \u2013 insatiable demand for the long-end from real money like pension funds and the Fed keeping front-end rates higher because of the resilience of the economy \u2013 the curve will stay inverted for a while.\u201d<\/p>\n<\/blockquote>\n

I interpret this meaning the typical correlation between inversion and recession breaking down because the term premium on long bonds is smaller than usual. Consider:<\/p>\n

<\/p>\n

then the 10 year- 3 month term spread is:<\/p>\n

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With the tp<\/em> term smaller than usual, then the pure EHTS rate might be higher than for a typical inversion.<\/p>\n

While the low or negative term premium argument sounds plausible, adjusting the spread by an estimated term premium (Kim-Wright 10 year from FRED, series THREEFYTP10), doesn\u2019t seem to change our view of how inversions correlate with subsequent recessions.<\/p>\n

\"\"<\/a><\/p>\n

Figure 3:<\/strong> 10 year minus 3 month Treasury spread (blue), 10 year minus 3 month adjusted by estimated Kim-Wright term premium (pink), both in %. NBER defined peak-to-trough recession dates shaded gray. Source: Treasury, Kim-Wright via FRED, NBER, and author\u2019s calculations.<\/em><\/p>\n

Hence, I join Cam Harvey<\/a> (who brought to prominence the yield curve as recession predictor) who says it\u2019s too early to drop the recession call.<\/p>\n<\/p><\/div>\n

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Source link <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

[ad_1] That\u2019s the title of an article by S. Ganguly for Reuters. Nearly two-thirds of strategists in a March 6-12 Reuters poll of bond market<\/p>\n","protected":false},"author":1,"featured_media":213489,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"_uf_show_specific_survey":0,"_uf_disable_surveys":false,"footnotes":""},"categories":[155],"tags":[],"_links":{"self":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts\/213488"}],"collection":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/comments?post=213488"}],"version-history":[{"count":2,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts\/213488\/revisions"}],"predecessor-version":[{"id":337631,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/posts\/213488\/revisions\/337631"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/media\/213489"}],"wp:attachment":[{"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/media?parent=213488"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/categories?post=213488"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/michigandigitalnews.com\/index.php\/wp-json\/wp\/v2\/tags?post=213488"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}