The Longest Inversion in History Is Over – Chart of the Day (9/4/24)

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The longest yield curve inversion in US history has ended at 783 consecutive days. For over two years, the longer-term 10-year Treasury yield has had a lower yield than the shorter-term 2-year Treasury yield, an atypical alignment.

But today, we’re back to a more normal upward slope, albeit a small one. The 2-year Treasury Yield of 3.76% is currently 1 bps below the 10-year Treasury Yield of 3.77%.

What does this mean for the economy?

Historically, the flip back to a positive sloping curve after a long inversion has occurred near the start of recessions:

-March 2007 flip back: recession began 10 months later, in January 2008.

-December 2000 flip back: recession began 4 months later, in April 2001.

-June 1989 flip back: recession began 13 months later, in August 1990.

-October 1981 flip back: recession began 2 months earlier, in August 1981.

-May 1980 flip back: recession began 3 months earlier, in February 1980.

But here’s where it gets interesting.

The yield curve remains highly inverted if we look at the shortest end of the curve, with the 3-month Treasury yield of 5.18% far exceeding the 10-year Treasury yield (3.77%). That’s been negative for a record 681 days and counting.

When will that streak end?

Only after the Fed starts cutting rates, which is expected to begin in two weeks at the September 18 FOMC meeting. But the first rate cut is only anticipated to be 0.25% or 0.50%, hardly enough to un-invert the full yield curve. So unless the Fed starts aggressively cutting rates, the 10-year/3-month inversion will likely be with us for at least a few more months.

And if they do start aggressively cutting rates?

That would likely happen because the Fed is seeing signs of a incoming recession, with the flip back to positive territory occurring faster as a result.

So is a recession inevitable?

No. Nothing is inevitable when it comes to markets and the economy. It’s certainly possible that in hindsight this will prove to be a false positive. But given the track record, that would be a historical outlier. The odds seem to favor economic weakness ahead.

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The post The Longest Inversion in History Is Over – Chart of the Day (9/4/24) appeared first on Charlie Bilello’s Blog.