Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox. The previous yield curve inversion was all the way back in 1988/89. Time From Yield Curve Inversion to Stock Market Top: 16 to 22 months, Percent Return In Stocks During That Time: Over 20%. It makes the curve steeper unless short-term rates rise even more. 2021 InvestorPlace Media, LLC. It’s just two points. The yield curve inverted in late 1966, for example, and a recession didn't hit until the end of 1969. Yesterday the yield curve inverted: the interest rates on 10-year treasury bonds were briefly lower than the interest rates on 2-year bonds. In early February 2000, the spread between the 10-year and two-year Treasury rates went negative, and stayed negative all the way until 2001. But, it does look like the excellent track record of the Inverted Yield Curve … They continued to rally after the inversion ended, too. The yield curve inverted in August 2006, a bit more than a year before the recession started in December 2007. In fact, the 2yr and 5yr did invert briefly in mid-December. Defined as the spread between long- … Haven't we heard this before? While it is true that a full yield curve inversion has preceded essentially every U.S. recession since 1950, it’s also true that such inversions are notoriously early. But why does the yield curve tend to invert before a recession hits? The second thing you notice is that at the start of the year interest rates for long-term bonds were generally higher than short-term bonds. Or maybe not. While the 2000 yield curve inversion was very timely, the timeliness of that inversion should be taken with a grain of salt. An inversion is a measure of upside-down markets logic. Further, the S&P 500 topped out in July 1990 at 370 — roughly 35% above where the index was trading at during the time of the 1988 inversion. However, the primary “constant maturity” rate version — used by the Treasury when calculating yield curves — did invert, albeit very briefly. This pushed short-term yields lower, and pushed the 10-2 spread into positive territory, where it stayed until 2000. 3 Megatrends (and 9 Stocks) to Buy for the ‘Blue Wave’. During that time, the yield curve dramatically flattened in 1988. Investors have consequently turned “end of the world” bearish, and stocks are plummeting. The curve shows the relation between the interest rate and the time to maturity, known as the "term", of the debt for a given borrower in a given currency. The Fed has also put a pause on rate hikes so far in early 2019. From the chart below, the downward trend appears to have been broken and the yield curve will not invert for now. That’s normal, but today it’s no longer the case. The first thing you notice is that interest rates are lower across the board than they were in January. Did Elon Musk Tweet Have Investors Piling Into SIGL Stock? All rights reserved. Inexpensive, too! As such, it’s easy to say that this inversion — while not wrong — was premature in calling a recession (perhaps the Fed is the reason why). An inverted yield curve, by contrast, has been a reliable indicator of impending economic slumps, like the one that started in 2007. On December 3, the yield curve inverted a little bit -- the first time since the 2008 recession. Helping normalize the curve were three Fed rate cuts — 25 basis points each — in the back half of 1998. Thus, this was a big and long inversion. They are. All Rights Reserved. Mother Jones was founded as a nonprofit in 1976 because we knew corporations and the wealthy wouldn't fund the type of hard-hitting journalism we set out to do. As of this writing, the S&P 500, Dow Jones and Nasdaq are all roughly 5-6% off their late July 2019 highs. Only late in that period did the yield curve invert, finally foreshadowing the 2000 recession. If you value what you get from Mother Jones, please join us with a tax-deductible donation today so we can keep on doing the type of journalism 2021 demands. At the time, the S&P 500 was trading around 1,400. Can you pitch in a few bucks to help fund Mother Jones' investigative journalism? That was just a coincidence and sure makes for a good headline! As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. The yield curve on a widely watched indicator inverted Wednesday for the first time since June 2007, before the Great Recession. ET We're a nonprofit (so it's tax-deductible), and reader support makes up about two-thirds of our budget. (It rose slightly at the end of the day and is now a hair higher than the 2-year rate.). Since 1950, all nine major US recession have been preceded by an inversion of a key segment of the so-called yield curve. Of note, this inversion happened about 21 months prior to the stock market peak in March 2000. The previous yield curve inversion was all the way back in 1988/89. Time From Yield Curve Inversion to Stock Market Top: About 21 months, Percent Return In Stocks During That Time: Around 40%. An inversion has preceded the last seven recessions in the U.S. 1125 N. Charles St, Baltimore, MD 21201. The Fed, worried about an asset bubble in the housing market, had been raising the fed funds rate since June 2004. I think it’s the latter. Specifically, there were a series of four yield curve inversions that started in December 2005, and ended in June 2006, when the spread between 10-year and two-year Treasury rates fell below zero and stayed negative until March 2007. Time From Yield Curve Inversion to Stock Market Top: Nearly 20 months, Percent Return In Stocks During That Time: Roughly 35%. Correlation with Economic Recessions Inverted yield curves attract attention from the economic community When it happens, recession warning lights begin to flash. As you can see, for the past 30 years, there has indeed been a recession within a couple of years after the inversion. This widespread loss of confidence explains why inverted yield curves have proceeded every recession since 1956. Roughly speaking, treasury rates tell you what investors think interest rates will be in the future. However, yield-curve inversion has a track record of predicting recessions pretty well, which is why people pay attention to it.