The Federal Reserve has continued to lift short-term rates gradually since December 2015, while long-term rates have edged higher, but more slowly. Historically, when short-term rates have exceeded long-term rates (creating an inverted yield curve), a recession and stock market correction have generally followed within the following year.
Although the yield curve has flattened considerably, the “term spread” (the difference between the 2-year and 10-year Treasury yields) remains well above zero (0.6%). As was the case in the 1990s, the yield curve could remain relatively flat for several years without inverting.
An inversion in the yield curve has typically presaged a recession and stock market decline on the horizon. In the absence of that, we don’t believe that the flattening of the yield curve as the Fed raises rates should create concerns about a recession in the near term or is a cause for alarm.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. You should consult a representative from PMFA for investment advice regarding your own situation. The information provided in this update is based on information believed to be reliable at the time it was issued. Any analysis non-factual in nature constitutes only current opinions, which are subject to change.