Inversion Back On The Table

You may have noticed that the yield on the ten year treasury bond is now below the Fed Funds rate creating a mild inversion. The futures market is squarely on the fence as to whether the Fed will hike again in June.

In the past few months the market has been inverted between the two year notes and the ten year bonds but that inversion was also mild and corrected itself fairly quickly.

The general concern is that an inversion often signals an economic recession coming. Most in the media seem to have little expectation that a recession could be coming and while the next recession could be far away there are a couple of things that should be considered.

The consequence of an inverted curve is that lend money becomes unprofitable for banks. Remember that banks borrow short and lend long. Anything, like an inversion, that impedes profitable lending is very like to have a negative impact.

Another thing to consider is that the current expansion is over four years old which is longer than the average expansion. The economic cycle has not been repealed; there will be a recession again regardless of who can time it correctly.

The stock market is a leading economic indicator. In past recessions the stock market has rolled over before GDP numbers revealed recession. It makes sense to think that the stock market will start to decline several months before the next recession.

With this post I am not trying to predict the date of the next recession but merely to point out how the market usually works. Recessions are not are not the end of the world, they are a part of a normal economic cycle and are not new to the market.