An inverted yield curve no longer a reliable indicator for recession

An inverted yield curve no longer a reliable indicator for recession, per Reueters.


A majority of strategists surveyed by Reuters have expressed doubts about the reliability of the U.S. bond market's inverted yield curve as an indicator of an impending recession.

The yield curve, specifically the difference between 2-year and 10-year U.S. Treasury yields, has historically been a strong predictor of recessions, with an inverted yield curve preceding nearly all recessions since 1955. However, the yield curve has been inverted for over 20 months, currently by 46 basis points, yet there is ongoing discussion in markets about the possibility of no recession or even an acceleration in economic growth.

According to the poll conducted from March 6 to March 12, 22 out of 34 bond market experts stated that the yield curve's predictive power has diminished. Zhiwei Ren, portfolio manager at Penn Mutual Asset Management, commented that the inverted yield curve is not as reliable as before due to factors such as high demand for long-end bonds from entities like pension funds and the Fed's maintenance of higher front-end rates due to the economy's resilience.
Since the global financial crisis of 2007-2008, the Federal Reserve has engaged in aggressive buying of Treasury securities as part of its stimulus efforts, leading to a larger share of the market being held in its portfolio. While some have argued that this ownership has distorted market pricing, the strategists interviewed for the poll did not cite quantitative easing as a reason for suppressed yields.

The poll also revealed that many financial markets have adjusted their expectations for when the Fed will first cut interest rates, pushing back estimates from March to May and now to June. As a result, several strategists have raised their 12-month forecasts for the rate-sensitive 2-year Treasury note yield, with a median forecast of 3.68%, 21 basis points higher than a month ago. The benchmark 10-year Treasury note yield is expected to fall modestly to 3.91% by the end of August and to 3.75% in a year, according to the poll of 60 strategists.
In terms of the Fed's balance sheet reduction, 14 out of 26 respondents predicted that the Fed would start tapering its pace of shrinkage in June. Seventeen of 26 respondents believed that the Fed would conclude its tapering program in the first quarter of 2025 or later.