Yellen says the US won't have a recession - we disagree'US TREASURY SECRETARY YELLEN: I DO NOT EXPECT A RECESSION TO OCCUR IN THE US.'
Janet Yellen said this yesterday.
The market disagrees.
Right now, we're seeing the 2s10s curve flatten.
When this happens, the market is expecting long term rates to fall relative to short term rates, or in other words, they're expecting bad times ahead.
Traditionally, the 2s10s curve has been a fantastic predictor of recessions, purely because the expectations of the future are exactly what is being displayed.
The horizontal red line is where the curve becomes inverted - which means short term rates are HIGHER than long term rates.
The indicator in the bottom panel shows recessions, identified by the red dots.
You can look back historically to when the curve has inverted to see that it certainly does predict an economic downturn.
If we conceptualise this to 'reality', ask yourself what a central bank does in a time of stress...
It lowers rates, right?
So it would make sense for yields further along the curve to be relatively LOWER than short term rates if the market is expecting a period of stress in the near future.
