An inversion in some measures of the yield curve might point to an economic downturn, but other segments of that curve suggest a more optimistic view of the U.S.’s growth prospects
Investors who foresee a recession because of the yield curve’s recent inversion might be looking at the bond-market indicator all wrong.
“While the short end of the yield curve has inverted for several weeks, the 2/10 year Treasury yield spread has widened a touch, an indication, I believe, that markets believe that we are not near a recession and that a near term rate cut or two will insure continuation of our expansion,” wrote James Meyer, a portfolio manager at Tower Bridge Advisors, in a research note.
As a result, the benchmark 10-year note yield TMUBMUSD10Y, -1.06% pushed below its 3-month counterpart TMUBMUSD03M, -1.71% in late May, and now trades at a negative 12 basis points. The S&P 500 SPX, -0.20% also retreated from its all-time high set in April 30, but currently stands at around 2% from that peak, FactSet data show.
A steeper, or positive shaped, curve is often associated with expectations of economic growth and inflation. Longer-term maturities are more vulnerable to price pressures, so inflation can push their yields higher than their short-term peers. On the other hand, a flat curve or an outright inversion can indicate when monetary policy and financial conditions are viewed as too tight.
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