Is this Yield Curve Inversion Different?

Michael LebowitzAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

Leading economists, Federal Reserve presidents, and investors pay close attention to the shape of Treasury yield curves. They follow them, but not necessarily because they care about the inner workings of the bond market. Instead, they are proven predictors of recessions. All six of the last recessions were preceded by an inverted yield curve.

Most U.S. Treasury yield curves have been inverted for over a year, but investors and pundits are questioning whether this time is different. Will this yield curve inversion lead to continued economic growth and avoid a recession?

I argue it’s not different this time, but the situation is unique.

The yield curves

The first graph below, charting the 10yr/2yr U.S. Treasury yield curve, shows that every inversion since 1980 has heralded a recession. The last four recessions didn’t start until the inverted curve returned to a positive reading.