An Inverted Yield Curve is an Excellent Predictor of Recessions

Feb 13, 2023 | Macro Insights, No Bull Economics

Bond Market Key Points

Inverted yield curves (when the 3-month yield exceeds the 10-year yield) reflect strong investor demand for long-term instruments (relative to light demand for short-term holdings) in anticipation that the Fed will cut rates in order to help fight a coming recession (consistent with McDonald’s economic base case for 2023).

As lower rates translate into higher bond prices, current holders of 10-year treasuries could be rewarded if the Fed starts to cut rates at the end of the year as the market suspects. Judging by the extent of the yield inversion, the bond market is currently expecting a doozie of a recession.  

10 Year Treasury Graph
10 Year Treasury Graph

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