For the month of September 2023, the yield curve has flattened a bit from its severe inversion.  The long-term yields, notably the 10-year yield and 30-year yield, went up significantly, while the shorter-term yields barely moved.

The 10-year yield started at 4.18% on September 1.  It ended the month at 4.59%.

The 30-year yield started the month at 4.29%.  It ended the month at 4.73%.

So the yield curve is less inverted than before.  Some might see this as good news.  If an inverted yield is a predictor of a recession, shouldn’t it be good news that the yield curve is flattening and may soon return to normal?

A History Lesson

Let’s look at what happened prior to the financial crisis of 2008.  The yield curve was inverted at the beginning of 2007.  On January 2, 2007, the 3-month yield stood at 5.07%.  The 10-year and 30-year yields were 4.68% and 4.79%, respectively.

The 3-month yield finally fell below the long-term yields in May 2007.  The yield curve was normal for 2008, or at least normal in the sense that there was no inversion between the 3-month yield against the 10-year and 30-year yields.

The financial crisis did not hit crisis stage until September 2008.  That’s when the Fed dropped its target rate to near zero and started going ballistic with its money creation.  This was the beginning of QE1.  The Fed’s balance sheet was less than $1 trillion going into September 2008.  Ah, the good old days.

The recession officially began in December 2007.  But for most of 2008, most people didn’t know we were in a recession.  Housing prices had started to come down, and there were certainly many indications of economic problems.  But the major crisis didn’t become evident until September.  The backdating of the recession happened after the worst of the damage.

It took about 7 months (May to December 2007) from when the yield curve uninverted to the time of the start of the official recession.  It took about 16 months from the time the yield curve normalized to when the worst of the financial crisis hit.

Does that put some things into perspective of where we are now?  If you compare to then, we are still in early 2007.

This Time is Different

There is the famous saying that, “This time is different.”

I happen to agree here.  This time is different.  It is different because the yield curve has been inverted to a much greater degree in 2023 than it was in 2006/ 2007.

We still haven’t gone back to flat yet.  With the long-term yields rising, it seems we may finally get there soon enough.  There is still a ways to go though.  Even if the yield curve goes to “normal” by the end of the calendar year, that means we might not start a recession until around June or July of 2024.  And the worst of the crisis might not become evident until well into 2025.

I have predicted that we are likely going to be in a recession by the 2024 presidential election in November.  The only thing that isn’t clear is if everyone will know that we are in a recession.

A lot of people feel the pain now and are experiencing their own personal recession with lower real (inflation-adjusted) wages.  But the statistics still tell us that the economy is growing.

Conclusion

Even if the yield curve continues to flatten and eventually normalizes, it doesn’t mean we are out of the woods.  It doesn’t mean that we have avoided a recession.  It actually means that the recession is closer.  It is common for the yield curve to normalize before the recession begins.

If you hear anyone tout this as good news, be sure to ignore them.  The bond market is signaling a major recession ahead.  It is just a question of how soon at this point.