#Recession Some say “The Yield Curve Inversion is Different This Time”

Yield Curve Inversion Forecasts Recession

They are wrong

Ten Year Yield vs Two Year Yield 
Yield Curve Inversion
Recession Warning 
Trump Slump
Ten Year Treasury Yields Minus Two Year Treasure Yields and US Gross Domestic Income NBER confirmed U.S. Recession Bars in Gray

Inverted Yields ARE an early warning of impending recession, this time.

This time is NOT different. Perma-bulls struggling to argue that a US recession is nowhere near continually cite the alleged resiliency of the Tens Minus Twos (Ten year US Treasury yield minus the two year US Treasury yield) . Their argument is based on flawed logic.

The fact of the matter is, the tens-minus-twos have not displayed a deep and prolonged inversion since the inflationary recessions of long-ago. Not since the early 1980s has that been the marker of an early warning sign (Graph above)

Indeed, as the graph above illustrates (courtesy FRED), the requisite depth of the 10-2 year treasure yield inversion as a reliable recession forecasting tool has been shallower and shallower the more the U.S. has transitioned from an inflationary cycle (Post WWII – early 1980s), and towards a deflationary one (early 2000s – present).

To make these stock pump-and-dumpers bull’s case even more strained, Morgan Stanley has run the numbers on the relative yield curve adjustment effects from all of the Fed’s experimental Quantitative Easing (QE), followed by their recent round of Quantitative Tightening (QT), and based on this plausible adjustment, at least the 10-year vs 3-months have already been quite negative, and for much longer than we may have been led to believe. (Graph below)

US Treasury Yield Curve Inversion adjusted for Quantitative Easing and Quantitative Tightening
10 Year-3Month Treasury Yield Spread Adjusted for the effects of QE and QT
(Credit: Morgan Stanley)

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