Bond Market’s Inverted Yield Curve Has Something for Everyone
With inflation easing, the current upside-down nature of market rates support the idea of a soft landing for the economy as much as they do a downturn.
In the eye of the beholder.
Photographer: Stefanie Reynolds/AFP via Getty Images
An inverted yield curve — when longer-term interest rates like the 10-year yield are lower than short-term interest rates like the 2-year yield — has historically been one of the most reliable indicators of a future recession. The theory is that an inverted yield curve shows that investors expect the Federal Reserve to cut interest rates in the future. And the usual reason the Fed cuts rates is because the economy is in recession. Indeed, there are many examples of inverted yield curves leading to recessions.
Right now, investors are getting worried because the yield curve has gotten very inverted — more inverted than it was in the lead-up to either the 2001 or 2008 recessions. The twist is that if you believe in the possibility of an economic soft landing, an inverted yield curve is also exactly what you want to see. And the market response to softening inflation data over the past two weeks seems to show this to be the case. So as someone who still thinks more than most that we have a better chance of achieving a soft landing, I'm on alert about the inverted yield curve, but not overly troubled by it at a time when the economic data is improving.