Is the yield curve anticipating a recession?

look at the below yield curve inversion chart

However, during a recession quality bond issuers must increase rates to receive capital. Yet, if we now see the Moody’s Seasoned AAA Corporate Bond minus the Federal Funds Rate, we see a very low spread. “Historically, when you get a sustained inversion like this … it’s a very reliable indicator of a recession coming,” says Duane McAllister, a senior portfolio manager at Baird Advisors.

What is the high yield outlook for 2023?

The market anticipates a gradual rise in the default rate to 4.8% by September 2023—the average default rate for the past five and ten years was 4.1% and 3.7%, respectively. COVID-19 related shutdowns contributed to a spike in high-yield default rates in 2020 and 2021 as default rates reached nearly 9%.

It’s important to understand that the shape and slope of the yield curve is driven by investor demand. Treasury Bonds increases, this will push down the 30-year yield. If there’s a big enough shift in demand from short-term debt securities to long-term debt securities, the yield curve can invert. On the flip-side, companies who issue short-term loans would expect to see a bump in interest payments.

S&P500 Performance

Yield curve inversions are regarded by many as warning signs of a recession, as they have consistently preceded US recessions. Since these inversions are specifically used to predict downturns, I looked at this in more than one way. Instead of looking at returns at each time frame, I looked at the drawdown from the inversion date to each time frame. In other words, what is the biggest loss one can expect over the next month, three months, six months, etc.

Does a yield curve inversion mean a recession is coming?

Some long-term investors may view an inverted yield curve as their last opportunity to lock in current interest rates before they turn south. Lower interest rates often reflect a slow-growth economic environment, and possibly, an imminent recession.

We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters. Treasury three-month bills to 10-year notes, the yield curve is inverted by 65 basis points, the greatest inversion for this measure since just before the 2001 recession. Under certain circumstances, such as those taking place right now, the shape of the yield curve can flip with short-term yields rising above long-term yields. The U.S. Treasury yield curve is essentially a visual way to depict yields on the range of bonds issued by the U.S. government, from Treasury bills to 30-year bonds.

Business industry expertise

In these cases, investors are actively storing their cash in safe long-term U.S. Treasuries and are less concerned about the opportunity cost of doing so. This unfriendly environment tends to sour the consumer’s mood. Though yield curve inversions tend to precede recessions, decisions made by consumers can ultimately flip the switch and force the economy into contraction. Alone, a yield curve inversion may not have a significant impact on most businesses.

The timing of the US empires rise to dominance, and the USD reserve currency status, bares an interesting relationship with the US yield curve. Once the USD achieved reserve status, it held perceived long-term value. From that point, the yield curve spent most of its time above zero. This is exactly why it’s important to understand the long-term statistics behind whichever yield curve you choose to use.

The U.S. Treasury Yield-Curve Recession Indicator Is Flashing Red

Note that you can zoom in/out by dragging any area of the chart. The yield curve refers to the chart of current pricing on US Treasury Debt instruments, by maturity. The US Treasury currently issues debt in maturities of 1, 2, 3, and 6 months—and 1, 2, 3, 5, 7, 10, 20, and 30 years. Current interest rates are shown on the US Treasury’s website.

  • For every recession since 1960, an inverted yield curve took place roughly a year before, with just one exception in the mid-1960s.
  • This can be alarming to any investor trying to plan for the future, since you’re earning less due to falling interest rates.
  • This gives a better understanding of what the risk is after an inversion.
  • Decisions or actions based on the information provided here are at the readers own account and risk.
  • This document does not contain the information necessary to make an investment decision.

A strong labor market and low interest rates pushed up prices, even as mortgage rates broadly doubled across the continent. For real price growth, most countries were in negative territory—notably Sweden, Germany, and Denmark. From this chart, one can see that the recessions of 2020, 2009, 2001, and all others back to 1960 were preceded by yield curve inversions. If investors could earn, for example, 3.5% on a 1-year treasury, or the same annualized 3.5% yield on a 30-year treasury bond, there’s usually little incentive for investors to put their money away for the longer term.

Visualizing (and Understanding) an Inverted Yield Curve

The Fund may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate. Yield Curves normally “slope upwards” (common terminology for being greater than zero on the above chart).

look at the below yield curve inversion chart

Do banks lose money when the yield curve inverts?

When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks.

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