This peculiar creature of an inverted yield curve.
On Thursday, the US Treasury yield curve sagged further in the middle, producing an ever more beautiful middle-age sag, so to speak, that first started taking shape late last year.
The chart shows the yield curves on seven dates. Each line represents the yields from the 1-month yield on the left to the 30-year yield on the right, on that date. The steep green line coming up from the bottom represents the yields on December 14, 2016, when the Fed got serious about rate hikes — the steep slope, with short-term yields a lot lower than long-term yields, is what a yield curve in normal-ish times is supposed to look like. The beautifully sagging red line represents the yields today, May 30:
The entire portion of the yield curve from the 3-year yield through the 10-year yield has now dropped by over 1 percentage point since the peak on November 8, 2018. Some more standouts:
The 3-year yield inched down to 2.00%, the lowest since January 2, 2018, forming the low point of the middle-age sag. On Nov 8, it was at 3.05%.
The 10-year yield dipped to 2.22%, lowest since Sep 18, 2017, and below 1-year and shorter maturities; but it remains above the 2-year yield and in this cycle has not inverted with the 2-year yield yet.
The 1-month yield ticked up to 2.37%, from 2.35% yesterday, which had been the bottom of its range, and as is to be expected, right in the middle of the Fed’s target range for the federal funds rate (2.25% -2.50%).
The 6-month yield had been anchored since late October at round 2.5%, with only slight variations. It now too has dropped out of this range and hit 2.38% over the past two days but ticked up to 2.40% today.
The 30-year yield dropped to 2.65%, the lowest since Nov 7, 2016. This is getting pretty nutty, when you think about it.
What began in November with a flat spot between the 2-year yield and the 7-year yield has now turned into this full-fledged middle-age sag as the Fed raised rates one more time in December, thereby pushing up short yields, even as the longer yields came down, but with the largest decreases in the middle.
The yield curve is inverted through the 3-year yield (red line in the chart slopes down to the 3-year yield). But it is still not inverted from 3-year yield to the 30-year yield (red line slopes upward).
This leaves the yield curve inverted in an odd way, with a sag in the middle, and depending on which classic inversion pair you look at, the yield curve is either inverted, or it is not inverted:
- The 3-month-10-year is inverted: 10-year-yield (2.22%) lower than 3-month yield (2.38%).
- The 1-year-10-year is inverted: 10-year-yield (2.22%) lower than the 1-year yield (2.29%).
- The 2-year-10-year is not inverted: 10-year yield (2.22%) is higher than the 2-year yield (2.06%).
The past six recessions followed the 1-year-10-year yield curve inversion with a lag of about 12-18 months. The inversions occurred where the red line (1-year yield) is above the blue line (10-year yield). Click on the chart to enlarge:
But the oddity remains: Historically, the 2-year-10-year spread inverts well before the 3-month-10-year. Not this time. Over the past six months, the 2-year-10-year hasn’t moved any closer to inverting. Today’s 16-basis point spread is about the same as late last year, despite the bottom threatening to fall out in the middle, which makes this inverted yield curve a peculiar creature with a growing middle-age sag.
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