I posted on the huge inversion of the 2/10 UST yield curve here:
US yield curve inversion, the recession indicator, is its deepest in 40+ years
Deutsche Bank on this:
- Last night the US 2s10s curve closed below -100bps for the first time in 42yrs.
- We have monthly data back to the early 1940s and there have been only 7 monthly closes below -100bps. So a real rarity.
- In all such occurrences (1969, 1979, 1980 and 1981) a US recession has either been underway, or has occurred within a maximum of 8 months.
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DB provides an 'in a nutshell' explanation on why YC inversion is not positive for the economy:
- Intuitively, when yields on short-end money are competitive with longer duration risk assets, there should be more circumspect investment behaviour with animal spirits slowly draining away. The front-end should become more attractive to the detriment of riskier ventures out the curve. This is why we think an inverted curve is such a good predictor of the economy over subsequent quarters.
Also, if its all voodoo to you, check out this video explanation from the Wall Street Journal. Note that its from a few years ago so the discussion in it of current events is outdated. The theory is the useful bit.
