Four Fun Facts about the Uninverted Yield Curve

Recession fears are back, stoked by the Fed’s large 50 bp rate cut and the uninversion of the 2s/10s curve. Inversion always precedes recession, but it happens with such large and variable lags it is not a useful predictor. Uninversions, which inevitably follow inversions, occur much closer to recession onset. But with the April 2022 inversion now almost 2-1/2 years old, and having self-evidently failed to predict recession, why should we trust the uninversion this time? Some research argues that the 3-month spot/18 months forward curve is the better indicator. It inverted later, so it hasn’t been as egregiously wrong. But it, too, predicts recession best when it uninverts, and it is a very long way from doing so. It’s time to dispense with the curve as a recession indicator, or for that matter to expect that it will necessarily revert to its historical average slope of 81 bp in the 2s/10s. We don’t accept the usual explanations for why the curve should be positively sloped normally, especially after the era of secular stagnation in which savers at the front end were crushed by near-zero rates.