Historically, curve inversions have been a useful indicator to suggest some unfavorable economic environment likely lies ahead. Today, there are inversions across several curves in the U.S., U.K., Germany, Canada, and elsewhere.
The U.S. Treasury 2s10s yield curve has been inverted since July 6, 2022, moving from -4 basis points to -77 basis points as of November 28, 2022. For historical context, the 2s10s curve was consistently inverted from December 12, 1988 through June 6, 1989, followed by moves in and out of inversion in the second half of 1989 into the beginning of 1990. The 1990 recession started eighteen months after the initial inversion and four months after the final inversion. The trough in the curve during this period was -45 basis points. Leading into the 2001 recession, the 2s10s inverted consistently from February 2, 2000 through December 28, 2000. The official start of the recession started thirteen months after the initial inversion and three months after the last inversion. The trough in the curve during this period was -52 basis points. Preceding the Great Financial Crisis, the 2s10s inverted on August 17, 2006 through March 20, 2007. The initial inversion came fifteen months before the recession and the last inversion was eight months before the recession. The trough in the curve during this period was -19 basis points.
The 3m10y has been inverted each day since October 25, 2022, decreasing from -4 basis points to -72 basis points as of November 28, 2022. The 3m10y curve inverted before the 1990, 2001, 2008, and 2020 recessions with troughs of -35 basis points, -95 basis points, -64 basis points, and -52 basis points, respectively.
The current curve inversions are not just a U.S. phenomenon, but are also occurring in the U.K., Germany, and Canada. The U.K. 2s10s is at -23 basis points, German 2s10s is at -21 basis points, and Canadian 2s10s is at -94 basis points.
In the U.K., the 6-month yield is the highest part of the curve. In the U.S., Germany, and Canada, the 1-year yield is the highest part of the curve. The long end of the curve is well below front end rates in each country. This typically occurs in periods where the outlook for future economic activity is not positive.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Economic Analyst
Boyd Watterson Asset Management, LLC