After U.S. Federal Reserve chair Jerome Powell testified before Congress last week, the U.S. yield curve reached its deepest inversion since 1981.
An inverted yield curve has often presaged a recession.
The yield curve inverts when the yield on short-term treasury securities is greater than those for their long-term counterparts—for example, when two-year treasury notes pay better returns than ten-year notes.
An inverted yield curve means that investors see interest rates rising in the short term, delivering better yields now but harming the economy over a longer time. That would force the Fed to lower interest rates, cutting yields on securities maturing in later years.
After Powell told Congress that the central bank is likely to raise its key interest rate higher than expected, the inversion widened to a spread of 1.047 percentage points, its largest since September 1981 when the U.S. was beginning a recession that would become the worst to that time since the Great Depression, Bloomberg noted.
The yield on two-year treasuries rocketed up to 5.015 percent, its highest since summer 2007. At the same time, the yield on 10-year treasury notes dropped 0.15 percent to 3.968 percent.
“It’s not unusual to get a yield curve inversion but it is unusual to get one of this magnitude,” Brian Jacobsen, senior investment strategist at Allspring Global Investments, told Bloomberg.
Deeper inversions do not necessarily mean deeper or longer recessions, he added.
TRENDPOST: The yield curve inverted the most deeply in almost 16 years which indicated that the Fed will drive interest rates high enough to send the U.S. into a recession. But Powell’s speech was days before the banking bust episode.
With fears of a financial calamity spreading through The Street, the oncoming recession will hit regardless of whether or not the Fed raises interest rates. Indeed, with fears of terrible economic times ahead, today Brent Crude plummeted 4 percent.