Inverted Yield Curve: Is it different this time? - Wells Fargo

According to analysts at Wells Fargo, the yield curve would need to invert significantly and remain inverted for weeks, if not months, before it would be a reliable recession signal.

Key Quotes: 

“On March 22, the yield on the 10-year Treasury note fell below the yield on the three-month Treasury bill for the first time since 2007, sparking fear of an imminent recession.”

“The degree of the recent inversion was insignificant relative to prior cycles. The curve inverted 17 months before the start of the Great Recession, and the spread fell to as much as -60 bps in early 2017. The curve would need to invert significantly and remain inverted for weeks, if not months, before it would be a reliable recession signal.”

“There is also some question about the reliability of the yield curve as a recession predictor at present. The purchase of Treasury securities by the Fed as part of its quantitative easing program collapsed the term premium on longer-dated Treasury bonds. That means the yield on the 10-year Treasury is arguably lower than it otherwise would be.”

“Every recession for the past 60 years has been preceded by an inverted yield curve. Every inverted yield curve, however, has not been followed by an imminent recession.”

“The yield spread has since turned positive. We would need to see further sustained inversion along with generalized restriction in financial conditions in conjunction with deterioration in economic fundamentals before we become truly worried.”