12/6 Question: What about the possibility of an inverted yield curve? That would appear to be another nail in the coffin of the bulls. Answer: The odds are overwhelmingly in favor of the yield curve inverting in the not too distant future.
That’s when the yield on two-year treasury bills exceeds the yield on 10-year treasuries.
The gap between them just hit its narrowest margin in more than a decade, and the gap between the two-year and five-year has already inverted. The yield curve is widely-followed because the two- and 10-year yields have inverted before every recession in the last 60 years. This is one reason the market all but collapsed on Tuesday. However, the strong possibility of an inverted yield curve is not our immediate concern.
Granted, it has a very accurate record of predicting recessions, but the lead time has been anywhere between six months and two years.
As this is written, the yield curve has yet to invert.
And while it has a very accurate record of predicting recessions, the lead time has been between six months and two years.
The last time the yield curve inverted was in late January of 2006. It should also be noted that the market has often produced some very worthwhile gains after the yield curve inverts. As an example, the yield curve inverted in May of 1998. But the S&P 500 did not peak until March of 2000, gaining almost 40% in the interim.
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