Yield Curve Inversion Is Back, Why Does It Matter?

Yield curve inverts in the US, signaling at least economic slowdown and hinting at the possibility of recession or a big decline in economic growth globally and in the domestic economy at most.

The yield on three-year US treasury has shot up to 3.45 per cent since Wednesday, from 0.96 per cent at the end of December 2021. As investors and the bond market brace for a sharp hike in policy rate by central banks to fight inflation, the yield curve has inverted in the US.

For the second time this year, significant portions of the yield curve are inverted (shorter-term treasuries yield more than longer-term treasuries).

These inversions are strong recession warnings although the spreads are small and the most watched 2-10 spread is still positive. However, the 3-year, 5-year, and 7-year notes all yield more than the 30-year long bond. Curiously, the 20-year note yield is way out of line with everything else.