A quirk in bond yields fans recession fears
Gyrating bond yields are warping the yield curve, an effect that’s becoming more pronounced, and its implications more confusing.
Driving the news: Investors are bidding up shorter-dated interest rates more than longer-dated, a condition known as a flattening yield curve, which Axios' Matt Phillips warned last week is a recessionary bellwether.
Why it matters: Skyrocketing prices have turned the Federal Reserve into inflation firefighters, while geopolitics is pressuring longer term growth forecasts.
- Investors are digesting so much that markets are getting indigestion — making it harder to cleanly decipher the yield curve’s messages.
What’s happening: On Monday, the difference between the 2-year Treasury and its 10-year counterpart narrowed to its smallest since February 2020.
- And the differential between 5-year notes and 30-year bonds actually inverted, which is when it costs the government more to borrow for the shorter period (in this case, five years) than for the longer term.
Between the lines: It's the first time the 5-year and 30-year have inverted since March 2006, Bleakley Advisory CIO Peter Boockvar wrote in a note to clients.
- Boockvar contended that an economic "soft landing is wishful thinking," given surging inflation and supply chains that are still under pressure.
Yes, but: The relationship between an inverted yield curve and a possible downturn comes with a lag, economists say. And yield signals are being largely distorted by years of the Fed's aggressive easy money policies.
The bottom line: Today’s inverted curve doesn’t mean tomorrow’s recession, but it certainly bears close monitoring.