Yield curve inversion conversations are dominating the media to the point it almost sounds like the start of a bad joke.
“A yield curve inversion walks into a bar. The bartender asks ‘hey, what’s got you down?'”
The conversations are primarily dismissive under the “this time is different” scenario. As noted by Yahoo Finance last week:
“Take a look at the August 2019 inversion. A recession did happen a year and a half later. But it was triggered by a global pandemic — something bond markets could not have possibly foreseen or predicted.”
That isn’t accurate as the recession occurred only 6-months later. Furthermore, the bond market did know there was something very wrong economically as the Fed was engaged in a massive repurchase operation to bail out hedge funds.
As we noted then, all that was required to push the economy into a recession was an “unexpected, exogenous event.” That event turned out to be a pandemic.
Notably, when psychology changes, for whatever reason, the rotation from “risk-on” to “risk-off” will find Treasury bonds as a “store of safety.” Historically, such is always the case during crisis events in markets.
Once again, it is pretty likely investors should not overlook the message from the bond market. Bonds are essential for their predictive qualities, so analysts pay enormous attention to U.S. government bonds, specifically to the difference in their interest rates.