Remember August 14? It seems like so long ago given everything that’s happened over the past two weeks, but that was the day when the 2s10s inverted. It was, to quote the president, “crazy inverted yield curve!” day. (It was also the day when #TrumpRecession was a trending topic on social media.)
Of course, the vast majority of voters couldn’t tell you the first thing about the yield curve, and while it’s true the 2s10s is a “mainstream” indicator, “mainstream” is a relative term here. It’s “mainstream” as far as yield curves are concerned, which is about like saying someone is “smart” as far as idiots go.
In combination with the Dow’s plunge, the 2s10s inversion was enough to grab the front-page of the business section in every newspaper across the country mid-month, but it still seems unlikely that Trump’s base would have gotten the message had he not tweeted the following on the afternoon of August 14:
Say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany, and many others, are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back.
Fast forward two weeks and the 2s10s sank to a new post-2007 low at -4bps on Tuesday.
That appeared to weigh on equities. The more “inversion” headlines there are, the louder the recession calls.
Given that this is bound to be back in the news, it’s worth noting that the 2s10s isn’t the best prognosticator of growth outcomes or asset prices.
“This curve doesn’t matter as much”, BofA wrote, in an August 23 note that takes a brief look at what investors should be focused on if they’re interested in the best lead indicator.
“The 3-month rate 1-year forward (1y3m) versus the current 3-month rate dominates all other curves we checked in its power to predict GDP growth, and it does a surprisingly good job”, the bank said, adding that “the flatter the curve, the worse the outlook for growth”.
There’s nothing particularly mysterious going on here. This slope is just a reflection of the outlook for Fed policy, and as BofA goes on to write, “it is very respectable – compared to other indicators – in its ability to forecast stocks and bond yields”.
Of course, if you ask Duke’s Cam Harvey – the “OG” yield curve whisperer – the die was cast back in June, when the 3-month-5-year curve wrapped up a full quarter of inversion.