Don't Miss a Fact,
Sign Up for FINfacts!

FINfacts is a weekly newsletter highlighting recent financings and economic insights.

Subscribe Here

“Extreme” Yield Curve Inversion Signals Recessionary Expectations, Bond Yields Drop

The 2 Year Treasury and the 10 Year Treasury inverted in July and have remained “out of balance” to this day. That inversion is often seen as a harbinger of a recession. Today, the 3-Month Treasury is higher than the 10 Year Treasury – this has occurred only 7 times since 1967. Markets may be saying that the Fed has raised rates too fast, without allowing for enough lag time to gauge the effects (which can be felt for up to a year after any given rate hike). This week has seen earning disappointments from tech companies as companies pull back on advertising. The Case-Shiller index indicated home price gains are dropping at the fastest pace on record as mortgage payments average 75% higher than last year. The Fed’s demand destruction strategy is “working.” Recent quotes from Fed policy makers indicate some concern over raising rates too quickly over the next few months. Bonds have rallied – after hitting a multiyear high of 4.32% last Friday. The 10 Year is down to 4.00% as of tonight’s close. The latest hopes are quantified in the futures markets – a 75 basis point increase is nearly assured at next week’s Fed meeting (94% probability), but the December meeting futures show a 63% chance of a 50 basis point increase, and 37% at 75. This Friday’s PCE report looms large as the final major inflation data point before next week’s meeting. Stay tuned…

By David R. Pascale, Jr. , Senior Vice President at George Smith Partners