The US treasury yield curve has inverted

While everyone was focussing on the relief rally in stocks yesterday, the US treasury yield curve inverted for the first time in over a decade. This is a negative signpost in a world in which the Federal Reserve is almost certain to raise rates at least twice more through March. What’s more is spreads of speculative-rated bonds widened at the same time, showing that the flight to quality in the US continues apace.

Not the 2-10 inversion yet

As you know, I have been saying all year that we risked inversion before the year was out. But I have been mainly talking about 2-year rates higher than the benchmark 10-year Treasury yield. The inversion we are seeing is in the middle of the curve between 3-and 5-year Treasuries,and between 2-year and 5-year Treasuries, a signal that the market sees the Fed cutting rates in the medium-term.

This is dangerous, obviously. But I am not willing to say it is a precursor to recession. It is a signal that the market believes the Fed will need to pause and eventually backpedal on its rate policy over the medium term. But it could do so without triggering a recession. A more complete inversion between 2- and 10-year Treasuries is a harbinger of recession because it means that the cuts the market is foreshadowing would be deeper and longer, likely as a result of a weakened economy plunging into recession.

The key here is whether the Fed takes this information onboard because I believe we are set for at least two more rate hikes here. We need to see what Fed officials say in the coming days, including chairman Jay Powell, who is due to make remarks later today. I will have a more complete outline of my thinking on this later in the morning.

I did want to get this out on Patreon though because I am limiting my writing on the newsletter to once a day for all subscribers. Gold level subscribers who want my economic and market updates will receive additional posts. Right now, those will appear on Patreon. But I am looking for a solution to migrate it back to my own website.

Thanks for your patience as I make the transition. Stay tuned for more on the inversion later today.

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