Yield Curve Inversion: What it Means and How it May Impact You

Source: YCharts

The recent flattening of the yield curve (specifically the 10-2 Year Treasury Yield Spread) has yet again garnered much attention from the media and market participants alike as many believe this signals an impending recession. The last inversion took place in 2019 prior to the beginning of the pandemic, merely a coincidence as the short Covid recession was driven by the virus and a purposeful economic shutdown.

The current flattening or inversion should be viewed in a wider context. Generally, this spread (graphically depicted by the green line) has had a relatively strong relationship to the 2-year-3 Month treasury spread (black line). However, these two are now moving in opposite directions. This implies that the short-end of the yield curve is very steep by historical standards while the intermediate-to-long end is flat.

This steep short end reflects expectations of aggressive policy response from the Fed to combat inflation. While valid, the consensus remains that inflation will moderate throughout the year as transitory factors abate (as the more substantial and relevant factor in long-term inflation trends is the increased money supply). This leaves the possibility of the Fed moderating their aggressive stance and the curve eventually pricing in fewer hikes.

As such, the current curve dynamic does not necessarily forecast a recession. It is more likely the market signaling that an overly aggressive Fed could smother an already soft economic growth trajectory more than anticipated. The Fed will be watching closely to incorporate market reaction into their future actions.

Lastly, while every recession over the past 70 years has been preceded by an inverted yield curve, not every inversion has preceded a recession. Where recession has occurred, an average of 20 months has separated the inversion and recession, with equity markets delivering generally positive returns during those intervening time periods.

At BerganKDV, our Wealth Management solution works alongside Investment Management professionals to ensure our client’s financial strategy is robust and diversified to address the uncertainties of the market. If you have any questions around the recent yield curve inversion, one of our advisors would be happy to assist you. Let’s have a conversation.

Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.

CATEGORIES: Wealth Management
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