WHAT IS THE YIELD CURVE TELLING US ABOUT THE POSSIBILITY OF A RECESSION IN THE U.S.?

Based on data shown on CNBC, over the past few months, the interest rate for two-year debt and the interest rate for five-year debt, both issued by the U.S. Treasury, have been ‘see-sawing’ to some extent.  However, most of the time since early December 2018, the interest rate on five-year U.S. Treasury debt has been less than the rate on two-year U.S. Treasury debt.  This suggests a likelihood that either (1) market participants may expect that interest rates for short-term U.S. Treasury debt issued in the future will be lower than they are presently, or (2) market participants have developed a relatively strong preference for five-year Treasury debt rather than two-year Treasury debt to the point where they have driven up the price of five-year Treasury debt and driven down the interest rate of that debt, despite the likely presence of a liquidity premium, or (3) a combination of (1) and (2) above.  These scenarios probably suggest that at least some market participants think that there is a reasonable chance of a U.S. recession in the relatively near future, which would be associated with a decrease in short-term interest rates.

Further, I think that I saw on CNBC this (Thursday) afternoon that the five-year Treasury rate had fallen below 2.440 per cent, and the two-year Treasury rate had decreased to less than 2.50 per cent.  These rates are at least somewhat close to the federal funds rate based on data from www.economagic.com.  Interest rates like these seem very low for this point in the business cycle, nearly a decade into the expansion.  What do these rates indicate about expectations for future economic growth, particularly if a liquidity premium is applicable?

Clearly, however, not all of the recent evidence points to a recession.  Despite the yield gap between the two-year and the five-year U.S. Treasury rates leading to a yield curve that has been inverted most of the time since early December 2018, the ten-year Treasury rate has remained greater than the two-year rate.  Does this indicate a forecast for continued economic growth?  What should we conclude?

It seems unclear what, if anything, U.S. Treasury debt interest rates are signaling.  Conflicting signals from the two interest rate spreads, the two-to-five year spread and the two-to-ten year spread, at least to this point make it difficult to make a firm conclusion.  Further vigilance of future developments with interest rates could lead to more decisive predictions.