Our markets experienced a tough day on Wednesday, as the yield on the 10-year Treasury Bond broke below the 2-year rate, an odd bond market phenomenon that has been a reliable indicator for economic recessions. The yield on the 30-year Treasury Bond closed at a record low on Wednesday. This scenario is called an Inverted Yield Curve. A Treasury Bond is much like a Certificate of Deposit (CD), except it is issued by our Federal Bank/Treasury instead of a community bank. It provides the promise of a fixed interest rate and is available in 2-year, 10-year and 30-year duration.
There have been five yield curve inversions of the 2-year and 10-year yields since 1978 and all were precursors to recessions, but there is a significant lag. Recessions occurred, on average, 22 months after the inversion. And the DOW enjoyed average returns of 15% 18 months after an inversion.
The last time this key part of the yield curve inverted was in December 2005, two years before our recession.
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