By CountingPips Research

(Yield Curve Inversions with Recessions in grey)

The US Treasury benchmark bond market inverted earlier today and according to history, a recession warning is triggered. Yield curve inversions occur when the yield on a longer-term bond falls below that of a shorter-term bond, signaling a sort of ‘upside-down’ situation that happens very rarely in the bond markets.

The benchmark 10-Year bond yield has fallen to a low of 2.43 percent in markets today while the yield on the 3-Month bond has held steady at the 2.46 percent level. This means there is a -0.03 inversion in the 10Year-3M curve.

The 1-Year bond yield has also been stable around the 2.46 percent level for an identical -0.03 inversion in the 10Year-1Year curve.

The shorter end of the yield curve (5-Year yield) has actually been inverted since December and today, the 5-Year bond yield (2.25%) has  accelerated further below both the 3-Month (2.46%) and the 1-Year (2.46%).

The historical significance of a yield curve inversion is that it can be a reliable warning that a recession will occur anywhere from approximately nine months to two years after the inversion.

The reasoning goes that investors are rushing into longer-dated treasuries (10-Years) because the growth outlook is diminished in their eyes and warrants a flight to safe assets.

The inversion of the yield curve does not mean that it is an absolute certainty a recession will happen but the track record has been pretty good.

According to the Cleveland Federal Reserve — which does a great job of tracking this monthly, (although not up to date yet) — the inverted yield curve has predicted the last seven recessions.

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