Another Sharp Yield Curve Inversion? Relearning How to Read Recession Signals

In his science fiction comic masterpiece, The Hitchhiker’s Guide to the Galaxy, author Douglas Adams described a book used by galactic hitchhikers who might land on new planets and face strange customs, unusual circumstances, and even grave danger. It is supposedly wildly popular. One of the reasons for this: “It has the words ‘Don’t Panic’ printed in larger, friendly words on its cover.”

That is a mantra that people participating in markets in general and in commercial real estate in specific should remember these days, as dueling information and interpretations come hurtling down.

For example, last Thursday, February 9, there were reports, like one from Bloomberg, that the interest spread between the 2-year and 10-year Treasurys had reached 86 basis points, the widest since the 1980s and, so, a sharper yield curve inversion, which is supposed to be a sign of a recession.

However, by the end of that day, difference was down to 81 basis points and went to 76 basis points by Friday’s close. On December 7, 2022, the inversion at the end of the day was 84 basis points, was 83 on December 6th and 8th, and was 81 on December 5.

And also in December, the spread between the 3-month and 10-year — an inversion considered more accurate by many economists — reached a high of 90 basis points on the 15th. Nine other days in that month, it was at least 80 basis points.

Now, the 2-year and 10-year yields have been inverted since July.

It’s been clear that whatever is happening with the yield curve and recessions is anything but straightforward. As Jeanna Smialek wrote at the New York Times last week:

“Employers added more than half a million jobs in January, the housing market shows signs of stabilizing or even picking back up, and many Wall Street economists have marked down the odds of a downturn this year. After months of asking whether the Fed could pull off a soft landing in which the economy slows but does not plummet into a bruising recession, analysts are raising the possibility that it will not land at all — that growth will simply hold up.”

Reuters separately wrote, “The rapid reopening of China’s economy, plunging European gas prices and cooling U.S. inflation suggest a global recession may not be as deep and protracted as feared just weeks ago.”

Some economists have been reconsidering previously observed relationships between unemployment and recessions and asking whether what has happened in the past necessarily always will.

Not to say that a recession is impossible. Far from it. But jumping on every twitch and spasm may be more distracting than useful.