There has not been a single day this summer without some sort of media comment like “investors are scared by the inversion of the yield curve” or “every inversion of the yield curve was followed by a recession within two years”. This calls a few short comments:
While ackowledging that an inverted yield curve is neither normal nor desirable, one should keep in mind that this inversion is just a reflection of fixed-income investors’ anticipations about the economy and, subsequently, the monetary policy.
By the way, we find it strange that, when it comes to assessing the economic outlook, economists, strategists and equity investors unanimously consider that bond investors’ opinion is much more reliable than their own…
Finally, to put things in perspective since the latest expansion phase has been unusually long, let’s not forget that the frequency of typical economic cycles is such that a lot of events have a high probability of being followed by a recession within two years.
When professionals come to look at the yield curve as a way of predicting the economy, without realizing that rates just reflect their peers’ anticipation about that economy, one has gotten a perfect ground for excessive reactions and self-fulfilling prophecies.