What story is the Yield Curve Inversion telling us?
Relevance for interest rates, inflation and asset prices
Yield curve inversion as a recession indicator
The 10Y-2Y yield curve is currently inverted, meaning yields for short term US treasury bonds exceed the yield for long term US treasury bonds. And it is not just simply inverted. Taking the yield spread between the 10Y and the 2Y treasury bond as a representation for this inversion, it is actually the most inverted in 40 years. Whenever this happens, there are many voices out there predicting a recession. This is a valid concern, in the modern era every time the yield curve has inverted, a recession followed shortly thereafter:
Will an inverted yield curve necessarily predict a recession? In order to understand the story that the yield curve is telling us it is important to understand the underlying mechanics. As it turns out it can be a recession indicator – but there are important nuances. First and foremost, it signals falling interest rates.
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