The yield difference between 2 and 5-year Treasuries fall below zero
After years of flattening, we're finally here. This is a topic that has been beaten to death since the start of the year and it's one that was imminent rather than questionable. With the Fed still hiking rates into next year, this was always coming.
The real question now is if the yield curve inversion this time around represents a different scenario than in the past? Previous occasions where this has happened has always led to a recession, most recently back in 2008 after the yield curve inverted in 2006-07.
Currently, the 2-5 Treasury yields spread has fallen back below zero but the 2-10 Treasury yields spread sits around 13 bps:
It's only a matter of time before this inverts too and the flattening yield curve will surely prompt a response by the Fed as we approach the FOMC meeting later this month. There's no doubt that Fed members are watching this closely but it's now a matter of how certain are they that this isn't a sign that a recession won't be coming this time around.
Frankly speaking, I don't believe anyone in the world can say with exact certainty that we will or won't have a recession based on this. But given how accurate this has been an indicator in the past, you can't rule out the possibility of a self-fulfilling prophecy in markets when everyone starts to feel some element of fear.
Sometimes that fear itself is enough to breed more fear and lead to an all-round panic and hysteria globally. For the doomsayers, you can finally come out to preach your case now.
