No one is talking about the risk of recession anymore. The consensus on Wall Street is that the Federal Reserve is going to achieve a soft landing for the US economy.
However the yield curve has been inverted for a long time. That’s true whatever spread you are looking at. If we focus on the spreads with the 10-year US Treasury yield we have:
- 13 months of inversion with the 1-month and the 2-month.
- 14 months of inversion with the 3-month and the 4-month.
- 17 months of inversion with the 6-month and the 1-year.
- 21 months of inversion with everything from 2-year to 7-year.
That is bad news because historically the inversion of the yield curve has been a harbinger of recessions, with a 100% track record over a 100 years.
So is this one an outlier? Is the bond market wrong? Is there something fundamentally different in the US economy today?
I don't have answers to those questions. But I sure do know that "this time is different" are four dangerous words, especially for investors.
The yield curve might very well become un-inverted in 2024 if the Federal Reserve is doing aggressive rate cuts like Wall Street expects.
But that’s no guarantee that the US will avoid a recession.