MNI BRIEF: Fed Paper Dismisses Yield Curve Inversion Signal

Yield curve inversion, especially the difference between yields on the 10-year and 2-year Treasury bonds, offer little signal on a future recession, according to a Federal Reserve board of governors research note posted Friday.

Two simple explanations for the recent near-inversion of the 2-10 spread are that markets do not anticipate the FOMC will seek to increase short term interest rates much beyond the next year and a half, or that inflation over the next two years is expected to be higher than during the subsequent eight, the note said. Neither explanation involves a recession.

"It is not valid to interpret inverted term spreads as independent measures of impending recession. They largely reflect the expectations of market participants," Fed economists Eric Engstrom and Steven Sharpe wrote. "Among various terms spreads to consider, the 2-10 spread offers a particularly muddled view."