Notes from the Upside-Down By: Gabriel PotterMBA, AIFA® 2019.03.25

The big economic news is that the US bond yield curve stopped merely flattening and now it is inverted.  Let us remind you what that means.  The yield curve plots how much return an investor will get for putting their money into US treasuries.  In general, the longer you invest (i.e. the greater your bond’s maturity), the more return you should expect. 

For the past few years, the treasury yield curve has been pretty flat.  In other words, it didn’t matter if you were putting your money into a 2-year treasury note or a 10-year treasury note – you were going to get a pretty similar rate of return.  Last week, the normal relationship broke and the yield curve inverted.  Specifically, 10-year treasury notes are now yielding less return (2.44%) than 3-month treasury bills (2.47%).  This is an important recession signal; it suggests long term investors have lost faith in the economy’s ability to generate growth (and inflation) in the medium term. 

It’s not an extreme inversion, nor is a recession guaranteed.  After all, the yield curve is the graphical summation of buyers-and-sellers of treasuries and these market participants can simply be wrong in their assessment of the economy.  However, it’s also worth remembering that an inverted curve is a reliable recession indicator; the last time we had an inverted yield curve was in 2007, right before the Great Recession.  

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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