Friday, March 22, 2019

Yield curve inversion means a recession in 1-2 years


https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

The above is a screenshort from Treasury showing the daily treasury yields.  The columns are 1 month, 2 month, 3 month, 6 month, 1 year, 2 year, 3 year, 5 year, 7 year, 10 year, and 20 year.  I didn't include the column headers because I don't want to spend time editing it and I don't want to have too much data.  The important thing to notice is that today the 1-year yield dropped only from 2.48 to 2.45 whereas the 2-year yield dropped from 2.41 to 2.31.  So the yield is 0.14 less on the 2-year than the 1-year.  Also the 3-year yield is even lower.

What does this mean?  I think it is a prediction that the Fed will cut rates by at least 0.25% after April 1, 2020.  And further that the Fed will cut rates again by at least 0.25% in 2021.  The only reason the Fed would cut rates is if there is an economic slowdown.

So based on this information, when will the recession start?  I like to make wildly inaccurate predictions so I predict it will start on July 4, 2020.  Just in time to influence the next election.

Note that the 1-year yield should usually be less than the 2-year yield, so watch the 1-year yield.  If it drops, that means the recession will happen within a year.

Update: as of 4/1/19, the 2 year rate increased to 2.40%.  This is now only 0.04% less than the 1 year, down from 0.14 referred to above.  Anything that is 0.05 is less is too close to predict anything.  So the recession scheduled to start on July 4, 2020 has been cancelled!

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