Market Insider

Investors should be more worried when the yield curve steepens again

Key Points
  • Many fear a yield curve inversion is signaling a recession, but strategists say a quick re-steepening would be scarier since the anticipated downturn could then be close at hand.
  • The spread between the 2-year yield and 10-year yield turned negative, or inverted, for the first time since 2007 on Wednesday, meaning the 2-year yield edged higher than the 10-year.
  • "One should be more worried when a rapid re-steepening occurs, as that is a better signal for an imminent downturn, at which point risk-off strategies make more sense," says one strategist.
RBC's Cassidy on what makes this yield curve inversion different and more unusual than in the past


That's also when investors could see a recession coming head on and sell stocks.





"One should be more worried when a rapid re-steepening occurs, as that is a better signal for an imminent downturn, at which point risk-off strategies make more sense," said Tobias Levkovich, chief U.S. equities strategist at Citigroup. "Economic retrenchment appears to emerge once the Fed seemingly reacts aggressively to counter GDP weakness but may be too late, aside from mitigating the extent of business activity declines."



"If you look into the last couple of recessions, the trough in the yield curve inversion occurs before the recession starts," said Jon Hill, rate strategist at BMO. "Then the curve starts to steepen, and we fall into recession. What really happens is when the curve steepens, the market prices recession with really strong conviction. It's the moment when a recession starts to appear rather likely that the front end rallies like crazy and the curve steepens."


"Recessions tend to occur 12-15 months on average after the Treasury curve inverts, but that also can stretch out two years," said Levkovich. "Thus, just making a single input investment decision can prove hasty and inaccurate."



"We also believe the pounding taken by banks or energy, while understandable, looks overdone. We further argue that health care could be a safe haven vs. hiding out in the dollar, gold or US Treasuries," he wrote in a note. He added that he had raised food and staples retailing to overweight last month.


"We do understand a preference for Utilities, however, as the business is arguably more stable," he said.