When the Yield Curve Inverts

When the Yield Curve Inverts

David B. Armstrong, CFA Weekly Market Commentary

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The difference between the 2-year and 10-year Treasury interest rate is referred to as “the spread”. When this number goes negative, the 2-year interest rate is higher than the 10-year interest rate.  It always spells trouble.

The markets are reacting to the spread shrinking. See the downward trending line on the right-hand side of the chart below.  It’s easy to infer that it will keep shrinking.  It’s also easy to infer that you should do something.

Don’t.

First – the current spread of 0.50% or 50 basis points (bps) is consistent with previous economic expansions. Look down at the years in chart where the spread was 50 bps. I created a dotted blue line at 50 bps in the chart to help.

1988, 94-97, 2005, and now. All solid economic times. A lot of time passes between hitting 50 bps and the dark gray bars that note a recession.  It’s years, not days.

Second – even an outright negative spread (an “inversion of the yield curve” is the term you’ll hear) leaves a one or two-year window until a recession starts.

2-year treasury yield

The problem is that while it is a reliable forecaster of a future recession, it’s useless as a timing tool.

If you are feeling anxiety and you are not sure about your plan or portfolio, call me.

Keep looking forward,

Dave  

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About the Author
David B. Armstrong, CFA

David B. Armstrong, CFA

David B. Armstrong, CFA, is a President and Co-Founder of Monument Wealth Management. Along with his role as the firm’s chief investment strategist and portfolio manager, Armstrong is viewed as an industry leader in several areas including innovative practice management, discretionary asset management, digital marketing and social media. Dave is the writer of Monument Wealth Management's weekly "Off the Wall" Financial Blog and Market Commentary, and is frequently sought after by journalists and event coordinators. Visit his full biography here.

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