Yield Curve Inversion: It's the Steepener That Hurts

Still inverted, the yield curve is in countdown mode...

MY DAUGHTER, who is taking an increasing interest in the economy now that she's out of school, working and trying to fund her artistic endeavors, mentioned an article she read about the economy, writes Gary Tanashian in his Notes from the Rabbit Hole.



The article stated that despite an inverted yield curve, the economy is improbably holding up.



At this point dad, the guy who never misses an opportunity to bore people to death with economy/market talk in real life, sprang into lecture mode.



Sensing her interest, I went further and marked up this graph from the St. Louis Fed and texted it to her while we were talking. I explained what I have bludgeoned you about when I see too much 'inverted yield curve means recession coming!' b/s in the media.



It's not the inversion, it's the subsequent steepening that runs with an economy decelerating into recession. This graph proves it absolutely, at least when taking a quant of history.



The shaded areas are recessions, dutifully following inversions but corresponding with steepeners.







Our theme for the last many months (after it hit me over the head that, duh, it's a terribly divisive election year) has been that the administration in power will do what it can to stay in power.



That includes funding of pet projects in the green energy space, the Semi Chips Act, rigging the GSEs with false (non-market driven) interest rates, heretofore robust government hiring (April being the first muted reading in many months of our tracking) and whatever else they can employ to keep up economic appearances.



The extended inversion shown above holds well to that script. It remains inverted, which is the product of a Goldilocks flattener. The timing could well be that this extended inversion will persist through the election.



As I told my daughter, it (a steepener) is coming but there is no time limit on how long an inversion can persist. That is why it is not good to listen to media eyeball and eardrum harvesting when it blares about "inversion!"



Those blow horns first began sounding back in 2022. But it's coming.