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Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Summary:
Update: The most prescient recession indicator the market just inverted for the first time since 2007. Don't believe us? Here is Larry Kudlow last summer explaining that everyone freaking out about the 2s10s spread is silly, they focus on the 3-month to 10-year spread that has preceded every recession in the last 50 years (with ...

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Update: The most prescient recession indicator the market just inverted for the first time since 2007.

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Don't believe us? Here is Larry Kudlow last summer explaining that everyone freaking out about the 2s10s spread is silly, they focus on the 3-month to 10-year spread that has preceded every recession in the last 50 years (with few if any false positives)... (fwd to 4:20)

As we noted below, on six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal. 

And here is Bloomberg showing how the yield curve inverted in 1989, in 2000 and in 2006, with recessions prompting starting in 1990, 2001 and 2008. This time won't be different.

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Equity markets appear to be waking up what this all means...

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

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On the heels of a dismal German PMI print, world bond yields have tumbled, extending US Treasuries' rate collapse since The Fed flip-flopped full dovetard.

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

The yield curve is now inverted through 7Y...

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

With the 7Y-Fed-Funds spread negative...

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Bonds and stocks bid after Powell threw in the towell...

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

But the message from the collapse in bond yields is too loud to ignore. 10Y yields have crashed below 2.50% for the first time since Jan 2018...

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Crushing the spread between 3-month and 10-year Treasury rates to just 2.4bps - a smidge away from flashing a big red recession warning...

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Critically, as Jim Grant noted recently, the spread between the 10-year and three-month yields is an important indicator, James Bianco, president and eponym of Bianco Research LLC notes today. On six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal. 

Bianco concludes that the market, like Trump, believes that the current Funds rate isn’t low enough:

While Powell stressed over and over that the Fed is at “neutral,” . . . the market is saying the rate hike cycle ended last December and the economy will weaken enough for the Fed to see a reason to cut in less than a year.

Yield Curve Inverts For The First Time Since 2007: Recession Countdown Begins

Equity markets remain ignorant of this risk, seemingly banking it all on The Powell Put. We give the last word to DoubleLine's Jeff Gundlach as a word of caution on the massive decoupling between bonds and stocks...

“Just because things seem invincible doesn’t mean they are invincible. There is kryptonite everywhere. Yesterday’s move created more uncertainty.”

Tyler Durden
Tyler Durden (a pseudonym) represents the idea that a return to truly efficient markets is a possibility and a necessity. After having experienced the inner workings of capitalism at various asset managers and advisors, Tyler believes that the current model is flawed and a deleveraging at every level of modern society is needed to reinspire the fundamental entrepreneurial spirit. Visit his blog: ZeroHedge (http://www.zerohedge.com/)

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