Yield Curve Inversion: Eight Reasons Why I’m Not Worried Yet

Well, there you have it: The Yield Curve inverted last month. Finally! Starting on March 22 and throughout much of last week, short-term interest rates (e.g., the 3 months bills) yielded slightly more than the bond market bellwether, the 10-year Treasury bond.

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The 10-year yield dropped below the 3-month yield for a few days in March!

People in finance and economics view this with some concern because history has told us that an inverted yield curve is a pretty reliable recession indicator. And I made this point in my post in February 2018: The yield curve shape, especially the slope between longer-term yields (10 years) and the short end (e.g., 2-year yields) is one of my three favorite macro indicators:

Retire at Market Peak Chart01
From last year’s post: Yield Curve slope (10Y vs. 2Y Treasury bonds) over time. A powerful recession early warning signal (1970-2018)!

Also notice that I usually look at the 10-year vs. 2-year yield rather than 3-month spread and that made a bit of a difference recently, more on a little bit that later. But in any case, since I went on the record about the importance of the yield curve and now got several reader requests to comment on this issue, here’s an update: in a nutshell, I’m not yet worried and here are eight reasons why…

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The scariest week for the stock market is also scary profitable!

Every six to seven weeks, we go through a tense week in the stock market. A bunch of very smart central bankers meet in Washington D.C. to decide on the path of U.S. monetary policy. Just like this week! U.S. monetary policy is determined by an elite group of Federal Reserve officials; the Federal Open Market Committee (FOMC). It has 8 scheduled meetings per year and the schedule is pre-announced for everyone to see. And the meetings are scary for the stock market. If by scary you mean scary profitable! Continue reading “The scariest week for the stock market is also scary profitable!”