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Deepest yield curve inversion in 40 years: will there be a recession?

“Inverted yield curve” is a phrase which has taken on an almost mythical quality in financial markets over the years. Bonds are currently spelling…

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11 months ago

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“Inverted yield curve” is a phrase which has taken on an almost mythical quality in financial markets over the years. Bonds are currently spelling doom, but it’s not as easy as it seems. So let’s dig into what it all means. I’ll try to answer three questions here:

  1. What is an “inverted yield curve? 
  2. How accurate has it been at forecasting recessions?
  3. Will there be a recession soon? 

What is an inverted yield curve?

First things first. The yield curve simply represents the different yields available on bonds of different maturities. And here, we will focus on US government bonds, which are the most common point of reference. 

Typically, longer-maturity bonds pay a higher yield. This makes intuitive sense, as the longer you hold a bond, the more risk you bear, and hence the higher yield you should scoop as compensation (I’m simplifying here, but that is the high level). 

However, an inverted yield curve describes a situation where the long-term interest rates are lower than short-term interest rates. And the legend goes that it is a good predictor of recessions (more on that later). 

The short-term interest rate is commonly set by a country’s central bank. In the US, this is the Federal Reserve, which sets what is commonly known as the Fed funds rate. This is the interest rate around which everything in the economy is priced. When the Fed hikes the rate, as it has done over the last year, the increase flows through to all borrowing in the economy – mortgages, credit card debt and so on. 

Longer-term interest rates are a little more nuanced. They, like any rate, are affected by the Fed’s decisions, but these rates are also heavily influenced by market rates. This is because, due to the longer time frame, there is an implicit forecast of what rates will be in the future. 

For example, if short-term rates are low (as they had been since the 2008 Great Financial Crash, until recently), then the market may forecast higher inflation in future. Accordingly, longer-term interest rates will be higher to compensate bondholders for the potential loss of purchasing power. This can result in a steep yield curve. This is a somewhat extreme – but topical – example, and general the yield curve’s “normal” shape is upward sloping anyway.

On the contrary, if interest rates are high but the market expects them to come down in future, today’s long-term interest rate could actually be lower than the short-term interest rate. This is the situation we currently find ourselves in: an inverted yield curve. Not only is the yield curve inverted, it is the deepest inversion in 40 years. 

Does the yield curve forecast recessions?

The 10-year / 2-year yield curve has often inverted before recessions historically, as the previous chart shows. Other maturities are sometimes compared, but the 10Y – 2Y is the one which has shown the most predictive power, and I will focus on here. 

The large gap in 1980 is obviously notable, but the curve was also prescient more recently – inverting ahead of the dot com bubble (2000), the GFC (2008) and… now. But it is not so simple so as to declare the yield curve as a crystal ball for recessions. 

If you’re eagle-eyed, you will see there was a quick inversion in 1998 when Russia defaulted on its debt, but a recession never came (as the Fed stepped in quickly to cut rates). And in August 2019, there was a similarly brief dip, only for the curve to be back to normal within a few months, a recession nowhere to be seen. 

But overall, the record is seriously impressive, especially when ignoring the swift inversions which were quickly resolved. In fact, over the last 40 years, every single time the  2-year yield has been above the 10-year yield for longer than six months, a recession has followed. 

As for the timing, this has varied, but in the same time period, a recession hit between 12 to 18 months after the yield curve inverted. The inversion in January 1989 preceded a recession commencing 18 months later in July 1990, the inversion in Feb 2000 preceded the (dot-com bubble) recession 13 months later in March 2001, and the GFC recession kicked off in December 2007, with the yield curve inverting 14 months prior.

But what about today? The yield curve inverted in July 2022, nine months before I am writing this piece. For the record, it very briefly inverted slightly in April 2022, but swiftly pulled back, and we know from earlier that brief inversions are not as powerful. However, it inverted again in July and has been negative ever since. Not only that, but it has become the deepest inversion since 1981. So, should we be worried?

Will there be a recession?

While the curve is forecasting a recession, the more interesting question from an investor’s point of view is how this will affect asset prices. And for this, the inversion is a lot less powerful, because of the concept of events already being priced in. 

A recession could come – indeed, this is the feel of a lot of the market currently – but this could already be incorporated into asset prices. We saw this in 1989, when the yield curve inverted in January but the S&P 500 increased 27% that year (before falling 6% in 1990 and then rising another 26% in 1991). 

In reality this is what makes markets so difficult. Stock prices trade with future information baked in, at least to the best of the market’s ability. It is the concept of an efficient market which I have talked so heavily about. 

As crazy as it is to say, stocks don’t always fall during a recession. Sometimes they fall before it, and the yield curve inverts in anticipation of the recession. In that case, it can almost be viewed as a recession slowly coming to the fore and driving the yield curve into inversion, rather than the curve itself forecasting a recession. 

It’s all getting a bit philosophical, but the point is that nobody really knows. If a recession does hit, it could be a brief and relatively painless one, or it could be a long and daunting pillage of the economy at large. No two recessions are the same, and the yield curve doesn’t help us much with trying to pinpoint which will be worse than others, nor what will happen. “Recession” is a very broad category.

Today, stock prices could have already adjusted to this potential for recession. 2022 was the worst year in markets since 2008, with the Nasdaq shedding a third in value and the S&P 500 losing nearly 20%. While 2023 has been kind for investors thus far, most asset prices are still down significantly from 2021. 

Timing the market is ever-so-difficult, and if you are looking for a simple get-rich-quick-scheme like “short the market when the yield curve inverts”, you’re living in fairyland. 

A favourite phrase during the pandemic was “these are unprecedented times”, overused to the point of madness. But today in economic terms, these really are unprecedented times. We have still-high inflation, a Fed claiming they will continue hiking, but a market betting that the tight monetary policy is all but over. 

Throw in the recent banking wobbles and the war in Ukraine, and it’s almost impossible to keep track of all the messy variables right now. As always, it’s not the sexiest answer, but with the weight of history and maths pulling in one direction, dollar-cost averaging may just be the easiest, and most correct, way to play it. 

The post Deepest yield curve inversion in 40 years: will there be a recession? appeared first on Invezz.

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Survey Shows Declining Concerns Among Americans About COVID-19

Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat"…

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31 mins ago

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March 11, 2024

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Survey Shows Declining Concerns Among Americans About COVID-19

A new survey reveals that only 20% of Americans view covid-19 as "a major threat" to the health of the US population - a sharp decline from a high of 67% in July 2020.

(SARMDY/Shutterstock)

What's more, the Pew Research Center survey conducted from Feb. 7 to Feb. 11 showed that just 10% of Americans are concerned that they will  catch the disease and require hospitalization.

"This data represents a low ebb of public concern about the virus that reached its height in the summer and fall of 2020, when as many as two-thirds of Americans viewed COVID-19 as a major threat to public health," reads the report, which was published March 7.

According to the survey, half of the participants understand the significance of researchers and healthcare providers in understanding and treating long COVID - however 27% of participants consider this issue less important, while 22% of Americans are unaware of long COVID.

What's more, while Democrats were far more worried than Republicans in the past, that gap has narrowed significantly.

"In the pandemic’s first year, Democrats were routinely about 40 points more likely than Republicans to view the coronavirus as a major threat to the health of the U.S. population. This gap has waned as overall levels of concern have fallen," reads the report.

More via the Epoch Times;

The survey found that three in ten Democrats under 50 have received an updated COVID-19 vaccine, compared with 66 percent of Democrats ages 65 and older.

Moreover, 66 percent of Democrats ages 65 and older have received the updated COVID-19 vaccine, while only 24 percent of Republicans ages 65 and older have done so.

“This 42-point partisan gap is much wider now than at other points since the start of the outbreak. For instance, in August 2021, 93 percent of older Democrats and 78 percent of older Republicans said they had received all the shots needed to be fully vaccinated (a 15-point gap),” it noted.

COVID-19 No Longer an Emergency

The U.S. Centers for Disease Control and Prevention (CDC) recently issued its updated recommendations for the virus, which no longer require people to stay home for five days after testing positive for COVID-19.

The updated guidance recommends that people who contracted a respiratory virus stay home, and they can resume normal activities when their symptoms improve overall and their fever subsides for 24 hours without medication.

“We still must use the commonsense solutions we know work to protect ourselves and others from serious illness from respiratory viruses, this includes vaccination, treatment, and staying home when we get sick,” CDC director Dr. Mandy Cohen said in a statement.

The CDC said that while the virus remains a threat, it is now less likely to cause severe illness because of widespread immunity and improved tools to prevent and treat the disease.

“Importantly, states and countries that have already adjusted recommended isolation times have not seen increased hospitalizations or deaths related to COVID-19,” it stated.

The federal government suspended its free at-home COVID-19 test program on March 8, according to a website set up by the government, following a decrease in COVID-19-related hospitalizations.

According to the CDC, hospitalization rates for COVID-19 and influenza diseases remain “elevated” but are decreasing in some parts of the United States.

Tyler Durden Sun, 03/10/2024 - 22:45

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Rand Paul Teases Senate GOP Leader Run – Musk Says “I Would Support”

Rand Paul Teases Senate GOP Leader Run – Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump…

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4 hours ago

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March 10, 2024

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Rand Paul Teases Senate GOP Leader Run - Musk Says "I Would Support"

Republican Kentucky Senator Rand Paul on Friday hinted that he may jump into the race to become the next Senate GOP leader, and Elon Musk was quick to support the idea. Republicans must find a successor for periodically malfunctioning Mitch McConnell, who recently announced he'll step down in November, though intending to keep his Senate seat until his term ends in January 2027, when he'd be within weeks of turning 86. 

So far, the announced field consists of two quintessential establishment types: John Cornyn of Texas and John Thune of South Dakota. While John Barrasso's name had been thrown around as one of "The Three Johns" considered top contenders, the Wyoming senator on Tuesday said he'll instead seek the number two slot as party whip. 

Paul used X to tease his potential bid for the position which -- if the GOP takes back the upper chamber in November -- could graduate from Minority Leader to Majority Leader. He started by telling his 5.1 million followers he'd had lots of people asking him about his interest in running...

...then followed up with a poll in which he predictably annihilated Cornyn and Thune, taking a 96% share as of Friday night, with the other two below 2% each. 

Elon Musk was quick to back the idea of Paul as GOP leader, while daring Cornyn and Thune to follow Paul's lead by throwing their names out for consideration by the Twitter-verse X-verse. 

Paul has been a stalwart opponent of security-state mass surveillance, foreign interventionism -- to include shoveling billions of dollars into the proxy war in Ukraine -- and out-of-control spending in general. He demonstrated the latter passion on the Senate floor this week as he ridiculed the latest kick-the-can spending package:   

In February, Paul used Senate rules to force his colleagues into a grueling Super Bowl weekend of votes, as he worked to derail a $95 billion foreign aid bill. "I think we should stay here as long as it takes,” said Paul. “If it takes a week or a month, I’ll force them to stay here to discuss why they think the border of Ukraine is more important than the US border.”

Don't expect a Majority Leader Paul to ditch the filibuster -- he's been a hardy user of the legislative delay tactic. In 2013, he spoke for 13 hours to fight the nomination of John Brennan as CIA director. In 2015, he orated for 10-and-a-half-hours to oppose extension of the Patriot Act. 

Rand Paul amid his 10 1/2 hour filibuster in 2015

Among the general public, Paul is probably best known as Capitol Hill's chief tormentor of Dr. Anthony Fauci, who was director of the National Institute of Allergy and Infectious Disease during the Covid-19 pandemic. Paul says the evidence indicates the virus emerged from China's Wuhan Institute of Virology. He's accused Fauci and other members of the US government public health apparatus of evading questions about their funding of the Chinese lab's "gain of function" research, which takes natural viruses and morphs them into something more dangerous. Paul has pointedly said that Fauci committed perjury in congressional hearings and that he belongs in jail "without question."   

Musk is neither the only nor the first noteworthy figure to back Paul for party leader. Just hours after McConnell announced his upcoming step-down from leadership, independent 2024 presidential candidate Robert F. Kennedy, Jr voiced his support: 

In a testament to the extent to which the establishment recoils at the libertarian-minded Paul, mainstream media outlets -- which have been quick to report on other developments in the majority leader race -- pretended not to notice that Paul had signaled his interest in the job. More than 24 hours after Paul's test-the-waters tweet-fest began, not a single major outlet had brought it to the attention of their audience. 

That may be his strongest endorsement yet. 

Tyler Durden Sun, 03/10/2024 - 20:25

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While “Waiting” For Deporation, Asylum

The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several…

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5 hours ago

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March 10, 2024

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The Great Replacement Loophole: Illegal Immigrants Score 5-Year Work Benefit While "Waiting" For Deporation, Asylum

Over the past several months we've pointed out that there has  been zero job creation for native-born workers since the summer of 2018...

... and that since Joe Biden was sworn into office, most of the post-pandemic job gains the administration continuously brags about have gone foreign-born (read immigrants, mostly illegal ones) workers.

And while the left might find this data almost as verboten as FBI crime statistics - as it directly supports the so-called "great replacement theory" we're not supposed to discuss - it also coincides with record numbers of illegal crossings into the United States under Biden.

In short, the Biden administration opened the floodgates, 10 million illegal immigrants poured into the country, and most of the post-pandemic "jobs recovery" went to foreign-born workers, of which illegal immigrants represent the largest chunk.

Asylum seekers from Venezuela await work permits on June 28, 2023 (via the Chicago Tribune)

'But Tyler, illegal immigrants can't possibly work in the United States whilst awaiting their asylum hearings,' one might hear from the peanut gallery. On the contrary: ever since Biden reversed a key aspect of Trump's labor policies, all illegal immigrants - even those awaiting deportation proceedings - have been given carte blanche to work while awaiting said proceedings for up to five years...

... something which even Elon Musk was shocked to learn.

Which leads us to another question: recall that the primary concern for the Biden admin for much of 2022 and 2023 was soaring prices, i.e., relentless inflation in general, and rising wages in particular, which in turn prompted even Goldman to admit two years ago that the diabolical wage-price spiral had been unleashed in the US (diabolical, because nothing absent a major economic shock, read recession or depression, can short-circuit it once it is in place).

Well, there is one other thing that can break the wage-price spiral loop: a flood of ultra-cheap illegal immigrant workers. But don't take our word for it: here is Fed Chair Jerome Powell himself during his February 60 Minutes interview:

PELLEY: Why was immigration important?

POWELL: Because, you know, immigrants come in, and they tend to work at a rate that is at or above that for non-immigrants. Immigrants who come to the country tend to be in the workforce at a slightly higher level than native Americans do. But that's largely because of the age difference. They tend to skew younger.

PELLEY: Why is immigration so important to the economy?

POWELL: Well, first of all, immigration policy is not the Fed's job. The immigration policy of the United States is really important and really much under discussion right now, and that's none of our business. We don't set immigration policy. We don't comment on it.

I will say, over time, though, the U.S. economy has benefited from immigration. And, frankly, just in the last, year a big part of the story of the labor market coming back into better balance is immigration returning to levels that were more typical of the pre-pandemic era.

PELLEY: The country needed the workers.

POWELL: It did. And so, that's what's been happening.

Translation: Immigrants work hard, and Americans are lazy. But much more importantly, since illegal immigrants will work for any pay, and since Biden's Department of Homeland Security, via its Citizenship and Immigration Services Agency, has made it so illegal immigrants can work in the US perfectly legally for up to 5 years (if not more), one can argue that the flood of illegals through the southern border has been the primary reason why inflation - or rather mostly wage inflation, that all too critical component of the wage-price spiral  - has moderated in in the past year, when the US labor market suddenly found itself flooded with millions of perfectly eligible workers, who just also happen to be illegal immigrants and thus have zero wage bargaining options.

None of this is to suggest that the relentless flood of immigrants into the US is not also driven by voting and census concerns - something Elon Musk has been pounding the table on in recent weeks, and has gone so far to call it "the biggest corruption of American democracy in the 21st century", but in retrospect, one can also argue that the only modest success the Biden admin has had in the past year - namely bringing inflation down from a torrid 9% annual rate to "only" 3% - has also been due to the millions of illegals he's imported into the country.

We would be remiss if we didn't also note that this so often carries catastrophic short-term consequences for the social fabric of the country (the Laken Riley fiasco being only the latest example), not to mention the far more dire long-term consequences for the future of the US - chief among them the trillions of dollars in debt the US will need to incur to pay for all those new illegal immigrants Democrat voters and low-paid workers. This is on top of the labor revolution that will kick in once AI leads to mass layoffs among high-paying, white-collar jobs, after which all those newly laid off native-born workers hoping to trade down to lower paying (if available) jobs will discover that hardened criminals from Honduras or Guatemala have already taken them, all thanks to Joe Biden.

Tyler Durden Sun, 03/10/2024 - 19:15

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