The chart below shows periods in history when the yield curve has been inverted. It takes the 10 year treasury yield and subtracts the 2 year treasury yield. Normally, you should get paid more interest to hold treasury for 10 years than 2 years. So when the 2 year has a higher yield than the 10 year, something is upside down or inverted.
Essentially, investors think that rates will go up so they are parking their money in the near term. When investors think that rates will go down the yield curve “uninverts.” (My spell check says that’s not a word, but I think you catch my drift.)
When the blue line is below the black zero line, the curve is inverted:
The shaded area indicates recessions. Do you notice a pattern? You might notice, barring the the 2020 pandemic-induced recession, an inverted yield curve came before every recession over this time frame. Do you notice any soft landings?
Furthermore, the yield curve is often on the way back to uninverting right before or during the recession.
On September 6, the yield curve uninverted. If you’d like to discuss what comes next, let’s book a call.