The Bond Market Rubicon Has Been Crossed

It was a milestone day in the bond market, and not in a good way. Thursday marked the 10th consecutive day that the most important part of the U.S. Treasury yield curve remained inverted, with rates on 10-year notes holding below those on three-month bills.

Most market participants know by now that every recession since the 1950s has been preceded by an inversion in this part of the yield curve. And while the curve inverted at the end of March, that episode only lasted five days. History shows that it must be inverted for at least 10 days for a recession to follow, according to Bianco Research. To be sure, this doesn’t mean a recession is imminent. On average, it has taken 311 days for the economy to begin contracting after the curve had been inverted for at least 10 days. “The longer an inversion lasts, the more damage it does to the economy” because it signals that Federal Reserve monetary policy is too tight, Jim Bianco, the firm’s president and founder, wrote in a research note Thursday. “Once an inversion hits 10 consecutive days, history shows that it continues for weeks, if not months.” The pressure is rising on the Fed. Markets are pricing in two to three quarter-point rate cuts from the Fed by year-end, possibly starting as soon as in two weeks, when policy makers meet.