Monday, December 3, 2018

A one day bond inversion does not a recession make UPDATED

 - by New Deal democrat

UPDATE: I have a much more detailed look at this inversion, with graphs and historical context, Up at Seeking Alpha.

You are going to read a lot about a yield curve inversion in the US Treasury market over the next 24 hours. (As of 5:30 PM eastern time, both the 3 year and 5 year bond yield slightly less interest than the 2 year bond.) Most of the commentary will probably boil down to "WE'RE DOOOMED!!! (in the next 12 to 24 months).

Maybe. But consider that, several times, an inversion somewhere along the yield curve has been a signal for the bond market to reverse (see, 1994 and early 1998). Further, consider that the Fed and its economists can understand this matter as well. And if this material should happen to form a segment on "Fox and Friends" tomorrow morning, a Tweetstorm threatening the job of Fed Chairman Powell might ensue.

Most importantly, consider that the Fed is an actor. The Fed has agency. The Fed can react to this news and affect its future course, maybe by deciding to pause its assumed rate hike later this month.

In short, a one day bond market inversion does not a recession make