Recession Signal Is Raising Its Ugly Head Again

EDITORS' PICK | 7,336 views | Feb 1, 2020, 12:16pm

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Chuck Jones Senior Contributor 


I cover technology companies, worldwide economies and the stock market



Economic Uncertainty. GETTY

In May 2019 the yield curve inverted when shorter term U.S. Treasuries had a higher yield than longer term ones. In particular the 3-month Treasury’s yield exceeded the 10-year on May 23 and except for one day in July, it remained inverted until October 10 for a total of four and a half months.

The 10-year Treasury yield remained comfortably higher than the 3-month until about a week ago. However, on Friday the 10-year yield fell to 1.51% and the 3-month closed at 1.55% for a difference of 4 basis points. For the month of January the 3-month yield ticked up by 1 basis point while the 10-year fell from 1.88% to 1.51%. Most of the 10-year’s decline occurred in the last two weeks of the month.

The main reason this happened was due to a risk-off, flight to safety trade which increased demand for the 10-year Treasury due to all the uncertainties regarding the Wuhan coronavirus. The move to the 10-year has also been exacerbated by trillions of dollars of negative yields in European and Japanese bonds, which makes U.S. longer term fixed income instruments more desirable. 

Second time in less than a year

One day does not make a trend but it is worthwhile to remember that this inversion ran for four and a half months last year and the lag times between this type of inversion and a recession starting has been between 8 and 18 months for the last three recessions. And for two of the three previous recessions (early 1990’s and the Great Recession of 2008/2009) the inversion occurred multiple times before the recession started.

10-year Treasury minus 3 month Treasury yield


Probably because the Fed has become more accommodative, investors seem to have come down with amnesia that there is a lag between the inversion of the yield curve and the start of a recession. If history is repeated a recession could start sometime this year.

While the just released GDP report shows the economy grew at 2.1% for the December quarter, when you dive into the numbers the report isn’t as strong as it appears on the surface.