Will The 3mo/10yr Ever Turn Positive Again?

The Financial Yield Curve Has Been Operating Wider Than Trend But That's Not Saying Much

November 20th, 2024 - Volume 10 (2024), Missive 253 (Wednesday)

• Inverted for over two years

• Yield curves are not recession indicators

• Mother yield curve says flatter figuratively forever

Yesterday, the yield spread between the 3month Treasury Bill and the 10year Treasury Note closed the trading day at -23 basis points (4.67 percent versus 4.39 percent). This happens to be some 7 basis points more inverted than it was just a few days ago (November 13th) but also the 519th consecutive day of a negative spread. In fact, it was the close of trading on October 24th of 2022 that produced the last positive spread when the two maturities ended the day with the 3mo at 4.16 percent and the 10yr at 4.25 percent. The 3mo/10yr US Treasury yield curve is known in market circles as the financial yield curve or Fed curve as it is much more reactive to changes, perceived or otherwise, in monetary policy. Given its shorter maturities, especially compared to that of the 2yr/30yr or economic yield curve, it is relatively easy to understand why this particular Treasury yield curve spread is so sensitive to the Fed and the financial sector it uses to achieve its goals of stable prices and full employment. Yet the persistence of the inversion of this curve through some major policy transitions speaks to a much larger issue guiding the economy and the markets that mark it. In this case, the economy is falling much too much behind its current rate of long-term potential, leaving it to discover leverage outside of the capital markets and leaving financial sector increasingly out in the cold.

The Fed curve has been inverted for over two years, straight.

Basic yield curve theory explains that an inverted curve is ‘bad’ or, at least, portents a difficult period for the economy either on the horizon or in the present. And while that can certainly be the case, it is important to understand that a yield curve is not