The most deeply inverted part of the U.S. yield curve is one that hasn’t sent a false signal about the prospects of a U.S. recession in more than a half-century of research.
Recession fears are back in focus after this week’s data provided fresh evidence that the Federal Reserve’s yearlong rate-hike cycle is finally having an impact on the labor market. The spread — which typically provides advance warning of a recession of anywhere from 6 to 18 months — first fell below zero in October. Initially, Harvey held out hope that the U.S. could avoid a downturn. Last December, he told MarketWatch that the gauge — which hadn’t been inverted long enough at the time to send a definitive statement — might be sending a “false signal” and that the probability of a soft landing was more likely.
The inversion of the Treasury curve matters for a number of reasons. One of them is that it’s upended the business model used by banks, which make money by lending at higher rates over the longer term than they pay borrowers for their deposits. An inverted yield curve helped sink California’s Silicon Valley Bank in March. “I have no idea how many more banks the Fed has put at risk, but I certainly hope they [policy makers] do,” Harvey said.
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