{"id":28529,"date":"2023-06-28T05:05:50","date_gmt":"2023-06-28T09:05:50","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/the-yield-curve-continues-to-signal-a-recession-why-investors-are-upbeat\/"},"modified":"2023-06-28T05:05:52","modified_gmt":"2023-06-28T09:05:52","slug":"the-yield-curve-continues-to-signal-a-recession-why-investors-are-upbeat","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=28529","title":{"rendered":"The Yield Curve Continues to Signal a Recession. Why Investors Are Upbeat."},"content":{"rendered":"
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The yield curve continues to signal a recession is on the way, but stock investors are looking further into the future.<\/p>\n

For nearly a year, since last July, the chart plotting interest rates on U.S. Treasuries of different maturities has been downward sloping. It means yields on longer-term debt are lower than on shorter-term securities. That\u2019s a reversal of the normal pattern known as an inversion of the yield curve. Longer-term rates are normally higher because there is generally more inflation and interest-rate uncertainty over the long term than in the short term, so bond investors tend to demand a higher yield to lend for longer.<\/p>\n

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An inverted yield curve can be a sign that investors expect higher interest rates or economic risk in the near term, and thus demand more compensation. An inverted yield curve has preceded every U.S. recession since the 1950s.<\/p>\n

The yield on the 2-year Treasury note is more than a percentage point higher than that on 10-year debt, the largest gap since early March, in the wake of the failure of Silicon Valley Bank. The 6-month Treasury bill has the highest yield on the curve, at 5.45%\u2014versus 3.71% for the 10-year note.<\/p>\n

An inversion this big hasn\u2019t happened since the 1970s and 1980s, another period of high inflation and rising interest rates that saw several recessions. <\/p>\n

According to Dow Jones Market Data, inversions of the 2-year and 10-year yields have preceded recessions by as little as seven months or as much as two years, so a slump could well be coming to the U.S. relatively soon. A recession probability model from the New York Federal Reserve that uses the 3-month\/10-year spread currently spits out a 71% likelihood of a recession in the next 12 months.<\/p>\n

The inverted yield curve doesn\u2019t say anything about the severity <\/em>of a coming recession, however. The stock market\u2019s resilience in 2023 despite the yield curve\u2019s warning signal could be due to investors\u2019 collective expectation that a potential recession later this year or in 2024 will be a shallow one. The worst of the regional banking mini-crisis appears to be in the rearview mirror, and there aren\u2019t obvious signs of an asset bubble about to pop or an impending credit crunch.\u00a0<\/p>\n

The U.S. economy might suffer a couple of quarters of declining gross domestic product, but the downturn won\u2019t be nearly as severe as recent recessions triggered by Covid-19 or the 2008-2009 financial crisis, the thinking goes, keeping corporate earnings aloft. Investors also appear to be confident that inflation will continue to decline toward the Fed\u2019s 2% target over the coming quarters.<\/p>\n

\u201cThe Treasury yield curve tells an important but incomplete story about the U.S. economy\u2019s risk of imminent recession,\u201d wrote DataTrek Research\u2019s Nicholas
\n Colas.<\/span>
\n \u201cMonetary policy is purposefully tight at the moment because strong labor markets are still feeding inflationary pressures. That the 3m\/10y and 2y\/10y spreads are in very unusual territory is the Fed\u2019s way of addressing that problem.\u201d<\/p>\n

The strength in the labor market that is fueling some of today\u2019s inflation could blunt the impact of a slowing economy, Colas argues, resulting in a relatively short, mild recession. That is giving investors enough confidence to focus on the recovery on the other side\u2014stocks are forward looking, after all\u2014and ignore the yield curve\u2019s warning.<\/p>\n

\u201cIn our view, equity market investors are largely \u2018looking through\u2019 this classic recession signal,\u201d wrote Wolfe Research\u2019s Chris Senyek. As of Tuesday, the
\n S&P 500
\n was up 13% so far this year.<\/p>\n

The yield curve could still steepen further and remain inverted for some time. Fed officials\u2019 median forecast after their latest meeting suggested another half a percentage point of interest-rate increases this year, which could lift short-term Treasury yields even further. Meanwhile, several factors are keeping yields low for longer-dated debt.<\/p>\n

\u201cThe long end of the curve is being held down relative to inflation due to excess liquidity in the markets and the high risk of secular global deflation resurfacing,\u201d wrote Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA. \u201cChina keeps falling short of growth expectations, and Covid did not reverse the excess supply of tradable goods in the global economy.\u201d<\/p>\n

Persistently low long-term rates also work against the Fed\u2019s rate hikes, supporting a \u201chigher for longer\u201d stance by the Fed. Usually, the curve uninverts once a recession arrives as markets price in a greater likelihood of the Fed cutting its benchmark short-term interest rate to support the economy. But if the recession is shallow and inflation is still elevated, the Fed might be slower to cut, Ricchiuto wrote.<\/p>\n

\u201cThis means the curve will stay inverted not just until the eventual recession begins, but through the duration of the contraction,\u201d he said. \u201cThe degree of inversion is also likely to get worse as time goes on.\u201d<\/p>\n

An extended inversion would continue to pressure banks\u2019 core business model of borrowing short to lend long\u2014taking in customer deposits to extend mortgages, for example\u2014but it isn\u2019t bugging stock investors. They\u2019re looking ahead to what comes next.<\/p>\n

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The yield curve continues to signal a recession is on the way, but stock investors are looking further into the future. For nearly a year, since last July, the chart plotting interest rates on U.S. Treasuries of different maturities has been downward sloping. It means yields on longer-term debt are lower than on shorter-term securities. […]<\/p>\n","protected":false},"author":1,"featured_media":28530,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"video","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-28529","post","type-post","status-publish","format-video","has-post-thumbnail","hentry","category-investing","tag-featured","post_format-post-format-video"],"yoast_head":"\nThe Yield Curve Continues to Signal a Recession. 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