For the first time in more than a decade, the US Treasury Yield Curve, the difference between 3- and 5-year Treasury yields, dropped below zero, marking the first portion of the curve to invert.
Impact? US Stocks on 2018-12-04 were in free fall, just a day after equity benchmarks mounted a rally that took the Dow Jones Industrial Average to its best close in a month, following a trade-tension moratorium between the US and China.
The timeline between inversion and economic slowdowns may not be instantaneous. The yield curve from three to five years dipped below zero during the last cycle for the first time in August 2005, some 28 months before the recession began.
To be precise, this is how the full yield curve chart looks like:
Based on that, 2018-12-04, Gundlach says yield-curve inversion signals that ‘economy is poised to weaken’.
While inversions have been reliable recession indicators in the past, the most important relationship — between the 3-month and 10-year government notes — is not inverted and thus hasn’t triggered the likelihood of a contraction ahead.
“While the inversion between the 2-year and 5-year point of the Treasury curve is notable, the spread between 3-month Treasury bills and the 10-year US Treasury is still 50 basis points and it could be many months before we see that point of the curve invert,” said Charles Ripley, senior investment strategist at Allianz Investment Management.
- Bloomberg, Brain Chappatta, 2018-12-04, “The US Yield Curve Just Inverted. That’s Huge.”
- CNBC, Jeff Cox, 2018-12-05, “Why it’s not time to panic over the bond market’s recession signal”
- MarketWatch, Mark DeCambre, 2018-12-04, “This Chart May Be a Key Reason the Stock Market is Plunging”