Inverted Yield Curves

The inverted yield curve is one of the best predictors of a recession. You can see below that each time bonds with a shorter duration return higher yields than those that have longer duration’s that the economy falters (indicated by the grey highlights). We have been slowly marching towards this point since 2014. As the Fed continues to set rate hikes, based on their perception of the economy’s strength, it has continued to press the two rates together. This tells me that investors have less confidence in the near-term economy than the government.

yield

My economics professor Christopher Schwarz at UCI recently supported this notion when he plotted the market’s forecast of the fed fund rate diverges from the Fed’s internal forecast. They start to diverge by an entire rate hike by 2018. See the chart below for a visual of this.

forecast

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