As the market searches for direction, one indicator is pointing toward a more somber scenario. The interest rate on the U.S. Treasury 10-year bond just fell below the rate on the 3-month bill in response to the Fed’s March announcement. The Treasury yield curve inverted for the first time since the last crisis on Friday, triggering the first reliable market signal of an impending recession and rate-cutting cycle. As economic relationships go, the yield curve has a good track record. Going back to 1982, the yield curve inverts before a recession and has done so reliably.

Recessions in the past have typically come around a year after an inversion occurred. A yield curve inversion implies a 25-30% probability of a recession over the next 12 months.  Data from Bianco Research shows that the 3-month/10-year curve has inverted for 10 straight days six or more times in the last 50 years, with a recession following, on average, 311 days later.

What does this signal to investors? Sell growth and go into conservative mode?

Future Wealth’s View

In our article on Dec 8, 2018 (link is here –, we had cautioned that if 2 year and 10 year treasury yields invert, the Fed is going to have to take out some of the hikes next year, signaling a slowdown in the economy. Well, we now have a situation where the 3 month and 10 year yields have inverted.  It is almost certain that the Fed would have to cut rates to avoid or prolong the prospect of a recession.

On Wednesday, the Federal Reserve lowered its own forecast of economic growth, to just over 2 percent for the year and signaled that it was unlikely to raise interest rates in 2019. Fed Chairman Jerome Powell said slowing growth in China and Europe present “headwinds” for the U.S. economy. And ongoing trade disputes are not helping.

There is a saying – “Measure of success is not how much make, but how much you keep.” For those who want to put aside these indicators and look to rosy times ahead, one word of caution – Recession.

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