Catalyst Corporate Federal Credit Union’s Zane Wilson Discusses Recent Economic Indicators and the Potential for a Recession

The Strategic Link partner explains the significance of a yield curve inversion.

5/14/2019 

A few weeks ago, the yield on the 10-year U.S. Treasury note briefly fell below the yield on the three-month Treasury bill, causing equity investors to worry about a potential recession. 

The inversion of the three-month to 10-year Treasury yield spread came about as bond yields fell around the world. Disappointing economic indicators from the European Union confirmed fears of slowing growth in a region already reeling from a trade slowdown and Brexit uncertainty. Stock investors flocked to the safe haven of Treasury securities, driving yields down. The Federal Open Market Committee cut its interest-rate-hike projections from two to none, and Jerome Powell, Chair of the Federal Reserve, cited global economic slowdown and tame inflation as reasons for caution. 

Catalyst Corporate Federal Credit Union’s Zane Wilson offers perspective on the situation. Catalyst is a wholesale cooperative financial institution that serves credit unions with core financial services including payment solutions, liquidity, and investment options. Wilson leads Catalyst’s brokerage division, working with brokerage client credit unions to provide balance sheet and investment expertise. 

“Catalyst specializes in offering credit unions wholesale financial solutions that make credit unions more efficient, competitive, and valuable to their members,” said Northwest Credit Union Association Vice President of Strategic Resources, Jason Smith. “Their insight and perspective on economic issues that could impact the future of Northwest credit unions is invaluable.” 

Yield curve basics

Many economists believe the three-month to 10-year Treasury spread, pictured above, is the most reliable data for the best overall picture.

The Treasury yield curve is generally upward-sloping, providing higher yields for investors who hold longer-term securities. An inverted Treasury yield curve could indicate investors may be worried about future economic growth, so long-term Treasury securities are favored, or overly tight monetary policy has short-term rates elevated, causing a slowdown in the economy. 

While inversions of other portions of the curve have also served as recession indicators, many economists believe the three-month to 10-year Treasury spread is the most reliable. Inversions of the three-month to 10-year spread have preceded each of the past seven recessions, with only two false positives. 

Should we be worried? 

A recession is not a certainty. Some economists have argued that the aftermath of the Federal Reserve’s quantitative easing measures, during which global central banks bought up government bonds, may have robbed yield curve inversions of their reliability as a predictor. Since so many Treasury securities are held by central banks, the Treasury yields can no longer be seen as market-driven. The Fed may have created an artificial yield curve that they cannot wind down for years. 

The yield curve has been flattening for some time, and it’s possible the three-year to 10-year Treasury yields would need to invert for a sustained period, rather than a few days, to signal a recession. 

We cannot ignore a rising recession risk, but for now, it has largely been a story of global growth concerns. If the global economy continues to deteriorate, however, the U.S. will feel the negative effects. On the positive side, if the administration can resolve trade agreement/tariff issues, we should see a bump in equities, Treasury yields, and economic growth.  

For more information on Catalyst’s partnership with Strategic Link, contact Jason Smith. For more information on Catalyst, visit its webpage