In terms of recession indicators, you can’t do much better than the yield curve.
The difference in yield between long-term and short-term bonds has presaged every US recession in the past 50 years and is considered one of the best indicators of where the economy is heading.
There’s been some worry that as the yield curve has been flattening — that is, as short-term bond yields have risen more than long-term yields — markets are indicating that the US economy is nearing recession.
But according to Jefferies’ chief economist Ward McCarthy there is no need to fear.
“Is the flattening trend in the yield curve signalling that the US economy is headed for a recession? The answer is no,” McCarthy wrote in a note to clients Monday.
“The slope of the coupon curve, as measured by the spread between the 2-year and 30-year, has averaged 144 bps,” McCarthy wrote. “By historical standards, consequently, the current slope of the yield curve is steep, not flat.”
McCarthy noted that yes, the curve is flattening some, but it’s been doing this off-and-on since 2011. And typically when recessions are looming the curve looks much worse than it is now.
Additionally, the flattening curve is really about a decline in oil prices that is driving down headline inflation more than concerns about a recession in the US economy.
“In this environment, the flatter curve is a reflection of deflationary pressures that have been driven by weaker global energy and commodity prices,” McCarthy added.
“It does not presage an economic slowdown, but rather is driven by a deflationary environment that has proven to be longer-lasting than transitory.”
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