Yesterday March 29th, 2022, a big thing happened in the bond market. The yield on the two-year government note briefly traded higher than the yield on the 10-year government bond, prompting what’s known as a “yield curve inversion.” This is relatively rare and often precedes recessions, which is why it is closely watched.
So is the bond market signaling that we are headed for a recession? Not necessarily. Another part of the yield curve, the spread from three-month to 10-year yields, has been getting steeper, not flatter. “There has never been such a directional divergence” in these segments of the curve, said Deutsche Bank’s Jim Reid, sharing a version of the chart above, which in recent days has been making the rounds in financial circles.
As for the yield curve’s predictive powers, this divergence could be a sign that “something genuinely is different this time,” according to Bloomberg Opinion’s John Authers. It could still be an indication of a recession, or it may just be market weirdness at a time when the Fed is trying to unwind the “mountain” of stimulus it enacted during the pandemic.
Source: The New York Times DealBook: 03/30/2022
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