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An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is a predictor of economic recession. (Investopedia)

The term spread—the difference between long-term and short-term interest rates—is a strikingly accurate predictor of future economic activity. Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve. Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession. While the current environment is somewhat special—with low interest rates and risk premiums—the power of the term spread to predict economic slowdowns appears intact. (Federal Reserve of San Francisco – March 2018).

Go back to 2005/2006/2007 you can see that the developing inverting yield curve was nicely predicting the coming recession even while our share markets were reaching all-time highs at the time.

The current US 2-year Treasury rate is 2.62%, with further in US cash rates tightening being predicted. The 10-year US Treasury rate has rallied from above 3% to currently 2.81%, leaving the 10 Year / 2 Year spread at .19%. With a couple of more interest rate increases imminent, it is quite likely that short term rates will exceed long term rates.

Investors will not be rewarded for taking risks out to a 10-year maturity when they can achieve higher rates with shorter durations and less risk.

Even if you can make a case that “this time it is different”, market sentiment will trade this move to the downside.