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While the risk cannot be dismissed entirely, in the big picture context...

Apr 2019
Julianna Donovan

Interest rates fell across almost all maturities leading to a “flatter” yield curve.

At the end of March, the yield on three month treasury bills slightly exceeded the 2.42% yield on the ten year Treasury note. This results in an “inverted” yield curve. An inverted curve often precedes prior recessions and is viewed by some as a “predictor” of future recessions.

While we acknowledge this has been true historically, we would make several further observations.

First, the most recent inversion was very mild and did not last beyond a few trading days.

Second, Treasury yields in the ten year part of the yield curve have been influenced by large purchases by the Federal Reserve as well as extraordinarily low (and in some cases negative) rates across the rest of the world. Large-scale purchases by central banks have never occurred prior to the current economic cycle. They have likely contributed to lower yields than would have occurred in their absence.

Finally, even when an inverted yield curve has preceded prior recessions there is usually a significant time lag between when the inversion first occurs and the start of the recession. Historically, this lag has been about fourteen months; the last inversion was in June 2006, which was followed by a recession seventeen months later. Business cycle fluctuations have become more stable in the last nineteen years. This is possibly due to the expanding role of services relative to manufacturing in the economy and better inventory management through technology. In the big picture context, risk cannot be dismissed entirely. We do not believe the most recent inversion signals an imminent recession.

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