Hi, I'm R.J. Gallo, Senior Portfolio Manager at Federated Investors.
Do recent yield-curve inversions portend a recession?
The inversion of the curve depends on where you're counting. The three-month bill to the 10-year treasury yield is the most common way to measure the inversion of the curve for academics and for the Federal Reserve. That is fully inverted about 25 basis points has been inverted now for a number of weeks. That is viewed as a major yellow warning sign that a recession may be coming. However, the two-year treasure yield to the 10-year treasury yield is not inverted. It's recently been steepening. I think one way of looking at these two different indicators and giving some interpretation for their diversions, the three-month bill is heavily linked to the Fed policy. The fact that it's inverted suggests that the market is highly confident that the Fed is going to have to ease. That's the only reason why the three-month bill yield is where it is. Meanwhile, the two-year treasury yield, which is a two-year horizon, not three months, has already fallen. Again, high confidence that the Fed will ease, but the curve isn't inverted. So I think we're in a critical juncture. Will the Fed act quickly enough, or will the trade complications be resolved constructively enough such that that recession doesn't happen.
Disclosure Views are as on June 5, 2019 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. The yield curve is a graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities. Federated Investment Management Company 19-10090 (6/19)