Yield Curve

Yield curve inversion takes place when the longer term yields falls much faster than short term yields. This happens when there is a surge in demand for long term Government bonds (e.g. 10 year US Treasury bond) compared to short term bonds.

Yield curve inversions are tipical when interest rates are rising or already at a high level, and markets start to have expectations that rate cuts will happen at some point in the future, among the reasons are:

• Expectations inflation will come down to low levels, allowing for monetary easing
• Expectations growth will decline in the future
• Expectations unemployment will rise in the future.

Not all yield curve inversion should be a confirmed signal of a recession, thats' why is important to understand the current enviromnent we are in and the sentiment among inversions, and use it along with other supportive data or indicators. However in the US, deep and long yield curve inversion have always followed a recession, and this is the reason is one of the most followed indicators by economist and investors.

Developments

February 2023

1. The 10Y2Y spread: Current inversion is around -81 bps, the worst level since the 1980s, the continuing inversion started on July 2022.
2. The 10Y3M spread: Current inversion around -98 bps, in line with the most serious inversions, the contuining inversion started on October 2022.
3. Majority of the yield curve is inverted at this moment, this condition has always preceded a recession

Abril 2023

1. The 10Y2Y spread: Current inversion is around -49 bps, it has started to steepen again
2. The 10Y3M spread: Current inversion around -153 bps, worst inversion since the data series started.
3. Majority of the yield curve continue to be inverted, this condition has always preceded a recession