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Is Yield Curve Inversion A 1998-Style False Positive? – June 10, 2019

Is Yield Curve Inversion A 1998-Style False Positive?

It is premature to price in a U.S. recession given the inherently political nature of protectionist dynamics and the fact that no economies are well served by a trade war. Relying on the slope of the U.S. yield curve to forecast a looming slowdown is hazardous. In the first instance, if no trade deal is struck by September, a rate cut is possible at the September Fed meeting, which recalls the Fed’s 1998 rate cut in the aftermath of the LTCM crisis.

Furthermore, the 1998 analogy is reinforced by the fact that currently the 2/10 segment of the curve is still upward-sloping, which is a distinction from past recessionary inversions. This year’s yield curve bears a striking resemblance to the inverted curve in September 1998; this inversion, which also featured a dovish Fed backstop, was not followed by a recession. Rather, what followed in 1999 was an extended run of outperformance for risk assets.