US Treasury Traders bet on more Fed rate cuts
Historically, the US economy has gone into recession seven times since 1960, and six of the downturns were foreshadowed by an Inverted yield curve, when yields on three-month Treasury bills are higher than for ten-year Treasury Notes. Usually, when lenders in the bond market are willing to accept lower interest rates for longer term debt than for shorter term debt, it is a signal that the US economy is about to experience a serious slowdown or even a recession within 12-months.
So far in this decade, the Inverted yield curve has made two grand appearances. Between March and Dec 2000, at the height of the frenzy for internet and high tech stocks, the yield curve was inverted, but stock market bulls argued that its shape reflected the Clinton administration’s retirement of longer term debt from huge budget surpluses. But the Nasdaq and S&P 500 did begin to implode in 2001, and an eight month economic recession arrived in 2002.
More recently, the yield curve inverted between February 2006 and June 2007. At its peak in February 2007, the yield on the US three-month T-bill rate was roughly 60 basis points above the benchmark 10-year yield. At that time, many analysts predicted the inversion would at least signal slower economic growth, but few were convinced it would spell a contraction of gross domestic product for two consecutive quarters, the typical definition of recession. The yield curve’s only wrong signal was in 1966, when the curve inverted but no recession followed.