In early April, shortly after the Federal Reserve’s first rate hike in four years, you may have heard the news that the yield curve had inverted and watched the crowd go wild with speculation. Is a recession definitely on the horizon now? Because in the past, yield curve inversion has often (but not always) been a predictor of a recession.
The yield curve quickly righted itself, but the noise about what its shape could be forecasting hasn’t died down. After a quick review of what yield curve inversion is, let’s cut through the clamor and see what our colleagues around Goldman Sachs think about using inversions in seeking to predict the future.
A yield curve chart plots current yields (interest rates) of bonds against their maturity dates (the date at which an investor will get their principal back). Yield curve charts can be created for bonds of all credit qualities and for different maturity ranges.
Charts of the US Treasury yield curve are widely watched, with particular interest paid to 2-year/10-year and 5-year/30-year spreads (the differences between yields for these bonds). You can find daily Treasury yield curve rates on the US Treasury website.
However, there are times when yield curves are flat – when all maturities have similar yields – and they can even slope downwards at times. A downward sloping or inverted curve means long-term interest rates are actually lower than short-term interest rates. That’s when the market can get concerned.
Yes, yield curves can often invert before a recession – but there’s more to the story. To shine more light on today’s situation, here are five deeper insights on yield curve inversion from our Goldman Sachs colleagues:
The yield curve today is flattish as a whole. However, with the Fed’s inflation-fighting policies underway, our colleagues expect inversions to happen more often. On the surface, this may look like a recession signal. But it’s important to look at the big picture and consider other metrics – statistics on wage growth and elevated household savings may counter that signal and suggest the economy can continue to grow .
The important takeaway: The view of our colleagues is that you generally shouldn’t rely on the yield curve or any one indicator to tell you if a recession is coming or what to do with your money. Although it’s an important metric, the yield curve is only one part of the story.
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