A combined measure of 10-year government bond yields from a basket of major economies has fallen below a similar basket of 1-3 year government bonds—in other words, you can get a (slightly) higher coupon payment if you go short than if you make a longer-term bond investment. (See chart.) That, of course, is the definition of an ‘inverted’ yield curve, which is one possible signal that a recession is approaching.
As you can see from the chart, the inversion is pretty mild at this point, but the trend is clear over the past 12 months. Investors tend to switch their attention to longer term bonds when they’re pessimistic over the outlook for the economy, and today they might believe the central banks are choosing to fight inflation vs. encouraging economic growth. Here in the U.S., the spread between two-year and 10-year Treasury yields recently hit its highest inversion level since 1981-82.
Of course, the collective wisdom of investors is not always right about these things. One analyst noted that the U.S. disparity between higher (4.37%) 2-year Treasury rates and lower (3.7%) 10-year rates might simply mean that investors think the U.S. Fed is going to keep raising interest rates (high short-term rates) and successfully tame inflation (meaning that the 10-year rate would offer positive after-inflation returns over time). But it’s worth noting that the last time we saw an inversion of this magnitude, during the Reagan Administration, the U.S. was in the midst of one of the worst economic downturns since the Great Depression. It’s definitely something to keep an eye on.
Sources: https://www.bloomberg.com/news/articles/2022-11-29/global-yield-curve-inverts- https://www.marketwatch.com/story/most-deeply-negative-treasury-curve-in- Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 5280 CARROLL CANYON ROAD, SUITE 300, SAN DIEGO CA, 92121, 619-6846400. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. LIVING LEGACY FINANCIAL INSURANCE SERVICES LLC is not an affiliate or subsidiary of PAS or Guardian. Insurance products offered through WestPac Wealth Partners and Insurance Services, LLC, a DBA of WestPac Wealth Partners, LLC. CA Insurance License Number - 0F64319, AR Insurance License Number - 9233390. | 2022-147731 Exp. 12/24 | This article was written by an independent third party. It is provided for informational and educational purposes only. The views and opinions expressed herein may not be those of Guardian Life Insurance Company of America (Guardian) or any of its subsidiaries or affiliates. Guardian does not verify and does not guarantee the accuracy or completeness of the information or opinions presented herein. Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. This material is intended for general use. By providing this content Park Avenue Securities LLC and your financial representative are not undertaking to provide investment advice or make a recommendation for a specific individual or situation, or to otherwise act in a fiduciary capacity. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Equities may decline in value due to both real and perceived general market, economic and industry conditions.