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Robert Burgess

The Bond Market’s Yield Curve Has Lost Its Way

An inversion has preceded every recession since the 1950s, but this time a downturn may not be inevitable. 

A little cloudy this time.

A little cloudy this time.

Photographer: Fox Photos/Hulton Archive/Getty Images

The bond market’s yield curve has a sort of mythical hold on economists and investors. It’s easy to see why, given that every recession since the 1950s has been preceded by an inverted curve, which happens when short-term rates rise above long-term ones. And right now, the curve is the most inverted it has been since 2000, with yields on two-year Treasuries almost 0.42 percentage point higher than those on 10-year Treasuries.

Naturally, that has many market participants saying a deep, long and nasty recession is on the horizon. But what if the yield curve is sending a much different message, one that is the opposite of an economic doomsday scenario? Perhaps the message is that the Federal Reserve will ultimately be successful in getting inflation back under control and closer to its 2% target and that a recession can be avoided. That would be beneficial to companies, consumers and financial markets. (The economy may have met the technical definition of a recession by contracting mildly in the first and second quarters, but it won’t be considered one unless the private National Bureau of Economic Research deems it one.)