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Economic Insights

An inverted yield curve is not a reliable predictor of U.S. recession.

The U.S. Treasury yield curve recently inverted, with long-term rates falling below short-term rates.

 

State of Inversion: The U.S. Treasury Yield Curve
Yield on U.S. Treasuries for indicated maturities, as of June 4, 2019

Source: Bloomberg. Chart represents yield of U.S. Treasury securities across available maturities as of June 4, 2019.
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.

 

Why might this be a concern? An inverted yield curve is often seen as a predictor of recession. Indeed, the last five U.S. recessions have been preceded by inversions. But not every inversion is immediately followed by a recession.

 

An Inverted Yield Curve Signals Recession—Except When It Doesn’t
Yield curve differential of the three-year U.S. Treasury note and the one-month U.S. Treasury bill (monthly except for endpoint), June 30, 1961–June 4, 2019

Source: Bloomberg. Shaded areas indicate recessionary periods. False signals are points at which the yield curve inverted and then subsequently turned positive without occurrence of recession.
Performance quoted above is historical. Yield curve represents differential between three-year and one-month U.S. Treasury yields. The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.

 

Instead of a narrow focus on the yield curve, Lord Abbett experts suggest examining a broad range of indicators to gauge the health of the U.S. economy. By those lights, the decade-long U.S. expansion appears poised to continue.

 

Table 1. What Are Key Recession Indicators Signaling?

Source: The Conference Board; Bloomberg; U.S. Federal Reserve; and the U.S. Federal Reserve Banks of Chicago, Philadelphia, and Atlanta. Data are most recent available (as of June 6, 2019).
The historical data are for illustrative purposes only, do not represent the performance of any specific portfolio managed by Lord Abbett or any particular investment, and are not intended to predict or depict future results. Investors may experience different results.
Past performance is not a reliable indicator or guarantee of future results.

 

In our view, the strength of recent economic indicators, along with measures of U.S. financial conditions, have negated the recession warning given by the inverted yield curve and suggest the end of the current economic expansion is not on the horizon yet.

–Giulio Martini, Lord Abbett Director of Strategic Asset Allocation

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