Yield curve likely to stay flat; no appearance of recession on horizon

12.20.18

There has been increasing focus on the possibility of an inversion in the yield curve, which has been a precursor to every modern-era recession. We believe the yield curve will stay flat for the foreseeable future, with no downturn in the U.S. economy on the horizon.

There has been increasing focus on the possibility of an inversion in the yield curve, as one section of the yield curve inverted for the first time in more than 10 years, with the yield on 5-year notes falling below 3-year notes. However, the recent inversion occurred in only one part of the yield curve.

The spread in yields between the 2-year and 10-year U.S. Treasury notes has tightened in the past year based on several factors, including the expectation that the Fed will steadily increase interest rates. In early December, when one part of the yield curve briefly inverted, the spread between 2- and 10-year yields was only 11 bps, with the 2-year at 2.80% and the 10-year at 2.91%.

While an inverted yield curve has been a precursor to every modern-era recession, a flat yield curve, on the other hand, does not seem to have much predictive power. We believe the yield curve will stay flat for the foreseeable future with no downturn in the U.S. economy on the horizon.


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