MacroResearchBoard

The U.S. Yield Curve Un-Inverts: A False Alarm – November 18, 2019

We did not agree with the bearish interpretation of the U.S. yield curve inversion this summer and stood apart from the herd calling for a recession. The recent un-inversion has been driven by higher bond yields (a bear steepener), rather than past valid recession signals that witnessed a re-steepening as a recession took hold due to falling bond yields (a bull steepener). Past recessions coincided with the Fed tightening further as the yield curve inverted, unlike the pattern this year which saw the Fed ease as the curve flattened.

MRB’s research team recently updated its forecast for the U.S. yield curve and positioning to take advantage of upcoming shifts. We concluded that the temporary inversion of the 2/10 yield curve this summer was a false recession alarm, and there was scope for further steepening in the near run but the 2/10 curve will then likely settle into a tight range in positive territory over the next 6-12 months. We recommend using further steepening to gradually take profits on 1/5 curve steepener bets and then move overall yield curve positioning to neutral.