Today the yield on the 10-year Treasury note has traded below the yield on the 2-year note, a signal that usually anticipates a recession. Analysts at Wells Fargo see the fundamentals of the economy generally sound. They expected the expansion to continue but warn about increasing risks.
“At the risk of making the mistake of claiming that “it’s different this time,” the yield curve at present may not be quite as reliable as a recession predictor as it has been in the past.”
“The purchases of Treasury securities that the Fed undertook as part of its quantitative easing (QE) program collapsed the term premium on long-dated Treasury securities. The Fed is still holding over $2 trillion of Treasury securities on its balance sheet, so the yield on the 10-year note at present is arguably ¼ percentage point to maybe as much as ½ percentage point lower than it otherwise would be. In other words, the yield curve may not be inverted at present if not for the Fed’s QE purchases.”
“The underlying fundamentals of the economy are reasonably sound. The balance sheets of the household, non-financial and financial sectors are generally in good shape, and financial conditions are not overly restrictive.”
“But there is plenty of uncertainty in the air. There are ongoing trade tensions between the United States and China, and the protests in Hong Kong could potentially lead to military intervention by China. The United Kingdom could crash out of the European Union on October 31. These uncertainties could potentially weaken business fixed investment spending even further.”
“We currently forecast that the economic expansion, which is now in its 11th year, will continue through at least the end of next year. But we readily acknowledge that the uncertainty noted above clouds the outlook. We could conceivably end up “talking ourselves” into a recession.”