Melpomenem By Kevin Flanagan In my last blog post, I discussed how the inverted Treasury ( UST ) yield curve may have lost some of its predictive luster with respect to foreshadowing a recession , at least up to this point anyway. However, there’s another topic that I’ve been discussing in client meetings that is slowly becoming a “hot” topic, and that is the timing for when the UST curve could “un”invert, i.e.
, move out of negative territory. Before I delve further, it is important to understand the dynamics behind yield curve movements. Remember, we are talking about two potentially moving parts: short-term rates and longer-term rates.
Interestingly, there can be a misconception that all rates tend to move in the same direction, but history has shown us that is not necessarily the case. In addition, even if short-term and long-term rates are moving in the same direction, it is the magnitude of these movements that can dictate yield curve developments. U.
S. Treasury Yield Curves Source: Bloomberg, as of 7/2/24. The two yield curves that are closely followed by market participants are the UST 3-Month/10-Year and UST 2-Year/10-Year differentials.
These two constructs went into inverted territory during the fall and summer of 2022, respectively. In addition, the magnitude of these negative spread relationships reached historical proportions. For example, the “peak” negative reading for the UST 3-Month/10-Year relationship reached a low watermark of -190 basis po.
