The outlook for the U.S. economy has brightened considerably in recent weeks, but the Treasury yield curve remains near its most deeply inverted level in at least four decades.
Why? A team of bond-market strategists at Goldman Sachs has a potential answer. In a note to clients published Wednesday, interest-rate strategists Praveen Korapaty and William Marshall said that, contrary to popular belief, the deeply inverted Treasury yield curve could be signaling that recession odds are declining, not rising.
No. Because The Fed doesn’t care about recessions. They care about two things: inflation and employment.
Inflation seems to be taming, although the Fed’s preferred measure is still above their target. But employment is very high. High employment (or low unemployment if you prefer to look at that side of the coin) can lead to inflation via wages rising faster than inflation. The Fed isn’t going to cut rates in the face of that very high employment number.
Duke University’s Campbell Harvey said the 10-year minus 3-month Treasury yield spread which he pioneered as a model may be sending a “false signal.‘’
Here are the reasons the professor is now citing for why the spread may not be as reliable an indicator of an approaching recession this time around, though it’s clearly pointing in the direction of “lethargic” economic growth:
Unusual employment situation…
Strong consumers and financial institutions…
Inflation-adjusted yields. Harvey focuses on inflation-adjusted yields because they better reflect the real economic outlook. “Once we inflation adjust the yields, the yield curve is not inverted — but it is flat (associated with lower growth but not necessarily a recession),” he said.