Investment Insights: Yield Curve Inversion: More Flurry Than Fury
By Cliff Aque, CFA, Investment Strategist
Investors are asking, “What does the current inversion in the yield curve mean?” The unsatisfying answer to this question is: Only time will tell. Since March 22 when the 10-Year Treasury yield fell below that of the 3-Month yield, there has been a flurry of stories about how an inversion in the yield curve is a precursor to recession. While it is technically true that an inversion has occurred before the last seven recessions, it can take a long time for the recession to appear and during that period the market can continue to rise.
The last time this “inversion flurry” occurred in early December 2018, we posted “What is Driving This Market” and examined when the 10-Year U.S. Treasury yield fell below the 2-year yield. After the last three inversions (12/13/88, 5/26/98, and 1/31/06), the S&P 500 continued to rise for an average of 20.7 months and gained an average of 30.9% (based on price return).1 As of this writing (March 28, 2019), the 10-Year has still not dropped below the 2-year, and the long-end of the curve is still relatively steep.