Yield curve inverts

The yield curve on US Treasury yields inverted today, as reported in this Globe & Mail article an event which has frequently signalled the beginning of a recession:

“Here is the historical record — we have endured eight Fed tightening cycles in the past three decades: the Fed has inverted the curve on five of those occasions, and out of those five Fed-induced inversions, the economy slipped into recession a year later all five times,” said David Rosenberg, North American economist for Merrill Lynch & Co. Inc.

The Big Picture quotes Alan Greenspan, who says “it’s different this time”:

Fed Chairman Alan Greenspan has noted that “its [sic] different this time.” He has challenged the view that “inversion signals economic trouble, pointing out that the shape of the curve is less predictive than it once was.” [emphasis theirs]

Others agree:

“[The inverted yield] has been taken as a negative omen, but I think you have to be cautious in today’s circumstances,” said Andrew Busch, global foreign exchange strategist for BMO Nesbitt Burns Inc. The yield has inverted at relatively low levels of interest rates and not the normally high levels of rates when the Fed tightens to subdue inflation, he said.

and

During the past 20 years, 10-year yields have exceeded two-year yields by an average of almost one percentage point, according to Bloomberg.

“This clearly suggests we are very close to the end of the tightening cycle … and it is not an indication of a recession,” said Michael Rottman, a strategist at Germany’s Hypovereinsbank.

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