The inversion of another part of the U.S. yield curve is leading to growing calls about the likelihood of a U.S. recession. Bond giant Pimco says those concerns may be premature.
“There’s reason to believe that this time around, yield curve inversion may not be as good of an indicator as it has been in the past, particularly given the enormous amount of quantitative easing undertaken by global central banks,” said Erin Browne, a fund manager at Pacific Investment Management Co. in Newport Beach, California, speaking in an interview on Bloomberg Television.
The U.S. 10-year yield briefly dropped below its two-year equivalent on Tuesday for the first time since 2019, crossing at a level of about 2.39%. The inversion is the latest in a series beginning in October, when 20-year yields topped 30-year ones. The spread between five- and 30-year Treasuries also turned negative this week, something that hasn’t happened since 2006.
The shape of the yield curve is a key metric that markets watch on, as it can have an impact on a range of asset prices and has historically been a signal of the economic outlook. Yield curves normally slope upward, so an inversion is taken to mean investors are more pessimistic about the long-term outlook and expect that a recession is nearing.
“What is probably more critical is really looking at why the yield curve is inverting and some of the peculiarities around this yield curve inversion versus prior periods,” Pimco’s Browne said.
Similar to the previous broad yield-curve inversion in 2019, concern has been mounting that Federal Reserve policy tightening will weigh on consumer spending and business activity. Unlike the last occurrence though, the central bank is battling the quickest inflation levels in a generation. This is fueling speculation that circumstances will require a more drastic adjustment in policy rates, with more harmful consequences.
While Fed policy makers and some bond-market strategists have cautioned against reading too much into the current yield inversions, DoubleLine Capital Chief Executive Jeffrey Gundlach says investors would do well to pay attention to the signals.
“Right on cue, the ‘It Doesn’t Matter This Time’ white papers are coming out,” he tweeted on Tuesday. “Don’t believe them.”