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Weekly Market Update

Record Yield Curve Inversion Sparks Recession Fears

The US yield curve has been inverted for 23 months — the longest in over 50 years — signaling potential recession risks. Despite aggressive rate hikes since March 2022, the anticipated recession hasn't materialized yet, leaving economists and investors wary.

5 min read
Head of North American Investment Strategy & Research

The yield curve usually slopes upwards as investors expect more compensation for the cumulative risks over the long term. For example, the 10-year note typically yields more than a 2-year note, but currently this is not the case. Today, the yield curve remains inverted as the hawkish Fed continues to fight inflation. But historically, the Fed has kept rates restrictive for too long, which frequently led to recession.

The above plot shows the amount of time, in months, that the US yield curve has remained inverted in past instances over the past 50 years. The Fed’s recent aggressive rate hikes started in March of 2022 and the curve initially inverted a few months later in July of 2022. Fast forward 23 months to today, and the curve still remains inverted. This is the longest period over the past 50 years, surpassing the 21-month period back in 1978-1979. Additionally, an inverted yield curve has typically led to recession since 1976. Yet, despite the current lengthy inversion, a recession has not yet materialized and the US economy continues to surprise to the upside. Will this time be different? We explore this topic a bit more in this week’s Fixed Income section.

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