Saturday, March 26, 2022

Yield Curve Warning

 One of the better predictors of recessions is the yield curve, especially when it inverts and/or flattens out very fast (ie when short term interest rates are higher or near long ones).  

An easy way to visualize this is the 10-2 year Treasury yield spread, see chart below.  Notice how the spread drops before recessions (in grey).  Will today be any different? Maybe - we didn’t get a recession in 1996-97, for example.

Another major difference after 2010 is the slow persistent decline culminating in 2019 right before the pandemic  - a period characterized by near zero inflation and very, very low interest rates, long and short. 

So, is there a recession in the cards? With inflation at 40+ year highs and interest rates still way below it, I don’t see how the Fed (and ECB) can avoid tightening further. Put it another way: the next recession may very well be a “punch bowl” type, where the Fed is forced to stop the party from getting out of hand. We haven’t had one of those in a very long time - I wouldn’t be surprised if younger readers don’t even know what I’m talking about ๐Ÿ™ƒ๐Ÿ™ƒ

No comments:

Post a Comment