The bond market signaled a recession–again. For the second time in a week, the closely watched 2-year Treasury note
rate rose above its longer-term counterpart in the 10-year Treasury note
representing an inversion of the bond-market yield curve. Yields inverted almost exactly a week ago and investors have grown increasingly anxious about the gauge, which has preceded the past seven recessions. However, Wednesday’s inversion isn’t anymore alarming than it was a week ago. The yield curve is a line plotting out yields across maturities. Typically, it slopes upward, with investors demanding more compensation to hold a note or bond for a longer period given the risk of inflation and other uncertainties. But, a legitimately inverted yield curve, for many needs to remain in force for a lengthier period than a day or days before it truly indicates a coming recession. On top of that, the inversion needs to be deeper than a few basis points. And even if the yield curve inverted late Wednesday, it wouldn’t be any more meaningful at pointing to an imminent recession than it was last week. From 1956, past recessions have started on average around 15 months after an inversion of the 2-year/10-year spread occurred, according to Bank of America Merrill Lynch. This most recent inversion came after minutes from the Federal Reserves July 30-31 meeting showed that Fed members believed that “it was important to maintain optionality in setting policy, perhaps indicating to some industry watchers that policymakers weren’t yet ready to communicate an aggressive path of rate cuts ahead. Meanwhile, the Dow Jones Industrial Average
finished Wednesday’s trade up 240 points, or 0.9%, at 26,202, the S&P 500 index
advanced 0.8% at 2,924, while the Nasdaq Composite Index
closed 0.9% higher at 8,020.
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