A small part of the yield curve inverted Tuesday.
Indicative bid yields on one-year Treasurys briefly dipped below yields on six-month Treasurys, reversing the customary pattern and producing what’s known as a yield curve inversion. Specifically, the indicative yield on the one-year was at 0.462% while the yield on the six-month was at 0.464% between 10:08 and 10:16 a.m. during the New York trading day.
While Tuesday’s inversion was short-lived, the spread between six-month and 1-year Treasurys remained extremely narrow or vanished altogether through much of the day. At 5 p.m. the yields were identical for the two maturities, according to Tradeweb data.
The curve has been a focal point during the recent market rout as investors wonder whether the U.S. is entering a period of recession. It’s regarded as a good predictor of future economic conditions since short-term interest rates rose above long-term rates before each of the last seven recessions.
The yield curve is a line depicting the yields of Treasurys of different maturities. Typically, longer-dated bonds trade above shorter term bonds since investors demand a premium for lending for longer periods when economic conditions are healthy. When there’s thought to be immediate stress in the financial system, the premium demanded in the short-term rises.
The yield curve can invert when investors believe an economic slow-down and even-lower interest rates are in the offing. Some economists believe that other factors, such as low inflation expectations or a high demand for safe savings vehicles, can also cause the curve to flatten or invert.
Tuesday’s yield curve inversion, however, was both brief and limited to short-term Treasurys. Typically when economists talk about an inverted yield curve they are referring to the spread between 10-year Treasury yields and 3-month Treasury yields.
Those spreads have narrowed since the start of the year but remain well into positive territory. By midday Wednesday, three-month Treasury’s yielded 0.35% compared with 1.85% on ten-year notes.
What’s more, an inverted yield curve does not always foreshadow a recession. Intraday inversions, in particular, have often been misleading signals. And the shortest-term Treasury bills trade at such tight spreads than any substantial movement can cause a so-called inversion. For example, during past debt ceiling debates, one-month Treasury bill yields have spiked.
By Wednesday, the spread was back to normal, with the six-month note trading at 0.461% and the one-year yield at 0.536%, according to Tradeweb.