That version never inverted in 1998. During that time, the yield curve dramatically flattened in 1988. WHY DID THE US YIELD CURVE INVERT? Consequently, while the inverted yield curve was yet again right in calling in a market top, it also again preceded a big rally. Even if the yield curve today does have as much economic predictive power as it used to, which it arguably does not, then this is a warning sign that stocks will top out in a year or more … not today. As such, it’s easy to say that this inversion — while not wrong — was premature in calling a recession (perhaps the Fed is the reason why). As of this writing, the S&P 500, Dow Jones and Nasdaq are all roughly 5-6% off their late July 2019 highs. With all that in mind, let’s take a look at the market’s four most recent major yield curve inversions, and how those inversions impacted the stock market. The study suggests this is consistent with about a 15% recession probability four quarters from now. ET By signing up, you agree to our privacy policy and terms of use, and to receive messages from Mother Jones and our partners. Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox. Subscribe today and get a full year of Mother Jones for just $12. This will be the opposite of inversion, if it persists. At the time of both the December 2005 and June 2006 inversions, the S&P 500 was trading around 1,250. The yield curve inversion we are experiencing since December 27th 2005 is now two months young and the negative spread has reached only 11 basis points. Simply, the yield curve tends to invert before economic downturns. The 10-year US Treasury yield rose above 3% for the first time in four years. Today, reader support makes up about two-thirds of our budget, allows us to dig deep on stories that matter, and lets us keep our reporting free for everyone. Since 1950, all nine major US recession have been preceded by an inversion of a key segment of the so-called yield curve. At the same time, it’s also true that: 1) the inverted yield curve could normalize with a few rate cuts in the back half of 2019, like it did 1998, and 2) the yield curve has been relatively flattish for the past decade, so an inversion today isn’t as meaningful as it historically has been. When it goes below zero, the curve is inverted. It's us but for your ears. The bond market is … Long-term Treasury bonds went on to outperform stocks during 2007. The good news, such as it is, is that there can be a long time between yield curve inversion and the start of a slump. However, the primary “constant maturity” rate version — used by the Treasury when calculating yield curves — did invert, albeit very briefly. Financial Market Data powered by FinancialContent Services, Inc. All rights reserved. But why does the yield curve tend to invert before a recession hits? Is this really the beginning of the end? Indeed, the S&P 500 didn’t top until mid-July 1990, nearly 20 months after the late 1988 inversion. The inversion was narrow and only lasted two months — spending a few days during that stretch in positive territory. That is, with respect to the past four major yield curve inversions dating back to the late 1980s, the average duration between the inversion and a stock market top is over 12 months, and the average gain in stocks during that stretch is well over 20%. While the 2000 yield curve inversion was very timely, the timeliness of that inversion should be taken with a grain of salt. Article printed from InvestorPlace Media, In 2008, long … It makes the curve steeper unless short-term rates rise even more. In finance, the yield curve is a curve showing several yields to maturity or interest rates across different contract lengths for a similar debt contract. Copyright © The yield curve has inverted before every U.S. recession since 1955, suggesting to some investors that an economic downturn is on the way. Here’s why: If you plot the interest rates for all the different US treasury bonds, you get a curve. It was a big and long inversion, with 10-year Treasury rates staying below two-year Treasury rates until late June 1989. About two months after that inversion, in late March, the S&P 500 reached an all-time high around 1,550, which it would not see again for several years. Or maybe not. I think it’s the latter. The last time the yield curve inverted was back in 2005-06, a few years before the 2007-08 market crash and economic recession. Thus, the 2000 inverted yield curve — unlike the 2005-06 yield curve inversion — was very timely (less than two months early). The 1998 yield curve inversion was the first of its kind in essentially a decade. The curve also inverted in late 2018. Specifically, there were a series of four yield curve inversions that started in December 2005, and ended in June 2006, when the spread between 10-year and two-year Treasury rates fell below zero and stayed negative until March 2007. All of these have one thing in common: they are associated with a weak economy. 1125 N. Charles St, Baltimore, MD 21201. The previous yield curve inversion was all the way back in 1988/89.