1. The Treasury Yield Curve Has Narrowed Significantly
2. Why an Inverted Yield Curve is Bad For the Economy
3. Economists’ Survey: Next Recession in 2020 or 2021
The “yield curve” has been a popular topic of discussion this year. The yield curve is the spread between interest rates at various maturities, typically among Treasury securities. Normally, there is an interest rate premium the further you go out on the maturity scale (1-year, 2-year, 5-year, 10-year, 20-year and 30-year).
The reason the yield curve has been getting so much attention this year is because the spreads between short-term interest rates and longer-term maturities have been narrowing. Some forecasters fear that the yield curve could “invert,” meaning that short-term rates rise above longer-term rates.
The reason this is important is because historically the yield curve has inverted about a year in advance of recessions. Recessions, of course, are usually bearish for stocks. In particular, traders watch the spread between the 2-year and the 10-year Treasury Notes, which has narrowed considerably this year.
While the US economy looks quite strong and may register 4+% GDP growth in the second half of this year, this economic recovery is quite old compared to most past business cycles. So, a recession in the next few years would hardly be a surprise. This explains all the attention currently being paid to the yield curve. That’s what we’ll focus on today.
The Treasury Yield Curve Has Narrowed Significantly
The yield curve is a line on a graph plotting the difference between yields for debt of different maturities. Since investors typically demand a bigger premium to lend money over a longer period, the line usually curves upward.
The yield curve can vary significantly depending on a host of factors including the economy, interest rates, Fed monetary policy, bank lending trends, loan demand, savings rates, inflation, etc., etc. As noted above, there is normally a higher interest rate premium the farther you go out on the maturity scale.