The financial media returned to a favorite topic in the last week, yield curve inversion, but we caution against getting caught up in the building frenzy.
The Treasury yield curve inverts when short-term interest rates move above long-term rates. As shown in the LPL Research Chart of the Day, the 3-month Treasury yield has sporadically moved higher than the 10-year over the last several weeks. Since the end of World War II, some type of inversion has preceded every recession, although often well in advance and shallow or brief inversions, such as we saw in 2019, can be a false signal.
“The yield curve is an important economic signal,” said LPL Chief Investment Strategist John Lynch, “but foreign demand for U.S. Treasuries and Fed bond purchases to stabilize repo rates are having an impact on the shape of the curve. We would need to see a much more decisive signal to be concerned.”
Based on our research, inversion needs to be pronounced to be meaningful. We would also typically need to see inversion associated with the Federal Reserve trying to pump the brakes on an overheating economy or being unresponsive to an economy that is significantly slowing. Neither appear to be in play now. Historically, the 3-month Treasury yield needs to sit at least 0.5% above the 10-year before becoming a potential red flag for recession, a signal that is still a ways off.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. The economic forecasts set forth in this material may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity
If your advisor is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL may also be employees of the bank/credit union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union. Securities and insurance offered through LPL or its affiliates are:
|Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value|
For Public Use – Tracking # 1-950059