by Mish

An inversion occurs when shorter term rates have a higher yield than longer dated rates.  Typically this is a strong recession warning.

Let’s start with a look at a couple of yield curve charts.

Yield Curve Monthly

Judging from the above chart I see little reason to believe there will be any inversion at the long end of the curve or between the long end of the curve and the short end of the curve.

Although yield curve inversions signal recession, yields are too low for the curve to invert.

Yield Curve 3-Months to 5-Years

Image placeholder title

Curiously, there was a very tiny inversion between between 6-months and 1-year on February 2. On that date the yield on one year treasuries was less than the yield on 6-month treasuries.

The amount was not even a full basis point (0.01 percentage points). The above chart shows they touched.

If the Fed hikes twice, I would expect portions of the short end of the curve to invert.

Yield Curve Spreads

  1. 3-month to 6-month spread: 12 basis points
  2. 6-month to 1-year spread: 14 basis points
  3. 1-year to 2-year spread: 21 basis points
  4. 2-year to 3-year spread: 12 basis points
  5. 3-year to 5-year spread: 28 basis points

Even one hike of 25 basis points could cause an inversion. If the Fed does hike twice, I would expect multiple inversions. The likely places are the 6-month to 1-year spread and the 2-year to 3-year spread.

Mike “Mish” Shedlock

Reader Questions on Yield Curve Inversions as a Recession Indicator

Reader Eric is curious about yield curve inversions. He writes …

Flattening of the Yield Curve in Pictures; Is an Inversion Necessary to Signal a Recession?

Curve watchers Anonymous has an eye on the yield curve. Here is a snapshot of year-end-closing values from 1998-12-31 through 2015-12-31.

Yield Curve Update: 10-Year vs 1-Month Inversion Persists

The yield curve inversion persists and even widened, selectively.

Relentless Yield Curve Flattening

Most economists expect the Fed will hike at least twice more this year. If so, portions of the yield curve may invert.

Yield Curve Inversions Again Stretch Out 7 Years

Huge portions of the the yield curve are inverted. Most of the inversions are by tiny amounts, but it's another warning.

22 Yield Curve Inversions: Recession at Hand, Buy Gold

Yields dropped across the board today as the Fed said it would be patient. A "Dot Plot" shows no hikes expected in 2019.

Yield Curve Bear Steepener?

Minyanville Prof. Bennet Sedacca is writing about the Bear Steepener.

Number of Yield Curve Inversion Points Rises as the Long-Bond Yield Dives

The US Treasury 5-year yield is now inverted with 3, 2, and even the 1-year treasury yield.

St Louis Fed Suggests Foolproof Way to Prevent Yield Curve Inversion: Don't Hike

The St. Louis Fed president Jame Bullard has a spotlight on yield curve inversion, and he wants to prevent one.