Although the yield curve remains inverted, a subscriber asks what it means that 10-year yields are making up ground on the 2-year. 

“We’re coming from the most deeply inverted yield curve of the modern era, so when it goes from -120 bps to -70 bps to -50 bps, you’re still at -50,” explains Keith McCullough in this clip from The Macro Show. “Historically, the curve being inverted at all is very bearish for something like a regional bank.” 

Before this year, the last time the curve was inverted 50 basis points or more was 2000. Even if the curve has gradually flattened in recent months, it’s not an indication the trend will continue. As Hedgeye’s CEO explained on today’s Q4 Macro Themes presentation, a massive economic slowdown is looking increasingly likely for the quarter ahead.  

“You can go from inversion, which is a leading indicator for a recession, to a curve that actually steepens during a recession,” McCullough adds. “That’s precisely because the Fed is late and panicking in cutting interest rates. If you haven’t made money in the 2001 and 2008 recessions like I have, it’s the same thing here. It’s leading you into the recession. The curve should steepen when you’re actually in it.” 

Watch the full clip above. 

McCullough: A Reminder About Recessions and Inverted Yield Curve - TMS Banner