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Yield Curve Inversion: Clarity Through the Sound Bites

Financial news is buzzing this morning as a result of the 10-year Treasury yield briefly trading below that of the 2-year treasury, a phenomenon, known as ‘inversion’. A sustained inversion is often considered an early warning signal around the strength of the economy and potential for recession.  The simplicity and irregularity of this if/then relationship makes for enticing media sound bites that may cause confusion regarding the immediacy of recession.

To help add clarity, we constructed a chart that outlines the lag between yield inversion and the peak of an economic cycle (blue bar, left axis) along with stock market performance (orange dot, right axis):       

Capture 1 - Yield Curve Inversion: Clarity Through the Sound Bites

As of this writing, the yield curve is no longer inverted, but nonetheless, will surely be discussed in media. As wealth managers, we consider this one reference point in a sea of data and, as always, encourage well-reasoned decisions rather than irrational or impulsive reaction around any single metric.