Yield Curve

As you know, I have written and given an interview on the Yield curve over the past year pushing back on the sensationalist writings of the naive reporters and newsletters scaring their readers. The only dispute I would have with this article is claiming the accepted 10 year minus Fed Funds Yield Curve instruments used for measurement.

10 Year minus Fed Funds or 10 Year minus 3 month treasury or 10 Year minus 2 Year or 30 Year minus 2 year have all been used.  In the 30 years I have been trusting this inverted yield curve indicator I have used the 10 year minus 2 year most often as did the NY Times, but all have some merit and none of them are close to sending an immediate Sell signal – recession – warning to the markets. The NY Times, like many others, assumes the approach towards inversion should cause alarm when in fact we could be many months away from an inversion and even then there is often a significant further delay.

With the artificial manipulation potential in the Fed Funds rate by the US Treasury vs the other free market determined instruments mentioned, I’m least trustful of using Fed Funds and would prefer the 10 minus 3 month or 10 minus 2 year. However, once one of these spreads invert, only then does it start the clock ticking towards potential trouble 6 to 24 months down the road from that point. And of course there could always be mitigating factors making this time different given the interesting dynamics of the first ever US/Global Quantitative Easing application this past decade along with a rapid change in aging demographics that may lead to new thresholds and relationships in the metrics.

I would also note that in the 1990’s when the 10 year minus 2 year first reached the current 2018 levels, it took more than 5 years before the stock market peaked and roughly 6  years before the economy moved into recession.

Bottom line is that none of the yield curves are signaling a slowing economy or impending recession (or stock market peak)

10 Year minus Fed Funds (most volatile and premature of the inverted yield curve relationships)