Yield Curve Inverted…. Again

by cbus20122

Probably not a surprise, but wanted to share this for discussion points. Given, the initial and brief inversion in April 2022 garnered most of the attention, but I personally think this one will get a bit deeper unless the Fed immediately walks back some rhetoric. Keep in mind, the inversion in April occurred before the Fed had even started to raise interest rates. It was more or less off the back of traders selling short-dated bonds in advance of the hiking cycle, and doing so more than they ever had before.

Typically the long dated end of the curve starts to call out the fed’s bluff during a hiking cycle as growth starts to slow down, which may be what’s happening right now.

As for inevitable discussions of recession and lag time from inversions, keep in mind that statistically, there is a wide window in which markets may or may not react to an inversion. In the Dotcom bubble, there was a secondary inversion that occurred right as the tech market topped in March of 2000. Recession didn’t occur until later, but for the purpose of investors trying not to lose money, the inversion essentially top-ticked markets. On the other hand, the initial GFC inversion occurred over 2 years before the 2008 meltdown. It persisted in being negative for quite some time after the initial inversion, which may have played a role in reducing lending activity.