What Is the Yield Curve Telling Us About the U.S. Economy?

Maybe it’s time to buckle up the seat belt.

By Pam Martens and Russ Martens of Wall Street on Parade

On November 9 of last year, a mere six months ago, we asked the question: “Does Jerome Powell Hear the Alarm Bells from Flattening Yield Curve?” Jerome Powell is, of course, the new Chairman of the Federal Reserve — the U.S. central bank and the body in which the United States has entrusted its monetary policy, for better or worse.

We wrote at the time:

“As of 7:48 a.m. this morning, the spread between the 10-year Treasury Note (yielding 2.33 percent) and 30-year Treasury Bond (yielding 2.81 percent) is even smaller, at a meager 48 basis points or less than half of one percent.

“It is a serious commentary on the bizarre financial times in which we live that a fixed income investor would be rewarded with less than half a percent of additional income to add 20 years of risk to the maturity date on his bond.”

Buckle up your seat belt because things have gotten a lot dicier since we penned that commentary. As of this morning at 6:41 a.m., the 10-year U.S. Treasury was trading at a yield of 3.06 percent while the 30-year U.S. Treasury was yielding a feeble 3.19 percent. The spread, meaning the difference between the two yields, has shrunk from 48 basis points on November 9 to a startling 13 basis points today.

We say “startling” because at this rate, we could be looking at an inverted yield curve faster than the Fed has factored into its thinking. An inverted yield curve, where short-term interest rates on Treasuries are higher than long-term rates, is typically a precursor to a recession. We saw this phenomenon ahead of the 2001 recession and in 2006-2007 ahead of the epic financial downturn in 2008-2009…

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