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Don’t Freak Out about the Yield Curve

Summary:
There are reasons to be concerned. The global economy is slowing. The US economy has slowed. Current policy (especially on trade) is a drag on growth. But I wouldn't freak out about the yield curve.In mid-1998 the spread between the 10 year and the 2 year went slightly negative, and a recession didn't start until 2001 - over 2 1/2 years later. Of course the Fed cut rates in 1998 - just like the current situation.When the spread turned solidly negative in 2000, the Fed was raising rates.   That would be a more concerning scenario.Also, with overall yields so low, I'm not sure this indicator is as useful as it has been.   The yield curve is indicating economic weakness, but I'm not currently on recession watch.Here is a graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury

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There are reasons to be concerned. The global economy is slowing. The US economy has slowed. Current policy (especially on trade) is a drag on growth.

But I wouldn't freak out about the yield curve.

In mid-1998 the spread between the 10 year and the 2 year went slightly negative, and a recession didn't start until 2001 - over 2 1/2 years later. Of course the Fed cut rates in 1998 - just like the current situation.

When the spread turned solidly negative in 2000, the Fed was raising rates.   That would be a more concerning scenario.

Also, with overall yields so low, I'm not sure this indicator is as useful as it has been.   The yield curve is indicating economic weakness, but I'm not currently on recession watch.

Here is a graph of 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity from FRED.

Don't Freak Out about the Yield CurveClick on graph for larger image.

Click here for interactive graph at FRED.

In general, I find new home sales and housing starts a better leading indicator for recessions than the yield curve.   And Year-to-date (through June), new home sales are up 2.2% compared to the same period in 2018. Not indicating a recession!

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