Orion’s brokers know that only a few interest rates are set, most notably by the Federal Reserve. Most interest rates, including mortgage rates, are set by supply and demand in an open market. If investors don’t want to buy a certain fixed-income security, the price of that security will fall, and the yield rise, until there is interest.

We bring this up to our brokers because the yield on the 2-year Treasury briefly exceeded the 10-year on Tuesday for the first time since 2019, in a warning sign that coming Fed rate hikes may trigger a recession. The inversion happened at a level of about 2.39%, but only lasted several minutes before things returned to a 5-basis point spread (another episode happened later on Thursday of last week). A short-lived inversion also occurred in the summer of 2019 amid the trade war with China, and while that was followed by the COVID downturn of 2020, the last persistent inversion of the Treasury curve occurred in 2006-2007.

What does itmean for your clients? A graph of yields, which have interest rates along the Yaxis and time along the X axis, typically slopes upward, so when short-term yields return more than longer-dated ones, it suggests there is reason to worry about the long-term outlook. It can also signal that the high levels ofshort-term yields are unlikely to be sustained as economic growth slows, which can have an impact on a range of asset prices. The typical metric that is watched is the difference between the 2-year and 10-year Treasury yields.

Brokers should know that, historically, a recession has not happened without an inversion. So likely, it will be a predictor of a future recession. The timing, however, is unknown. It could take up to two years, and plenty of unforeseen things can happen in the interim.

A series of inversions besides the closely-watched 2s/10s proxy have recently occurred as traders price in more and more rate hikes. 20-year yields topped 30-year yields last October, while the gap between 5-year and 30-year yields turned upside down last Monday. As the Federal Reserve embarks on a cycle of quantitative tightening, there are fears that it will reduce consumer spending and business activity as the central bank battles the highest inflation rates in a generation.

But before brokers start sounding the “recession alarm,” some economists will tell youthat there's reason to believe that this time around, yield curve inversion may not be as good of an indicator as it has been in the past, particularly given the enormous amount of quantitative easing undertaken by global central banks. And Fed Chair Jerome Powell recently announced that he's paying more attention to the first 18 months of the yield curve rather than anything that goes on afterwards.

The inversion could also be more of a blip than a lasting trend, and in fact, Orion’s brokers should be aware that the curve steepened again towards the end of the week. No one can predict interest rates, and the timing of interest rates, with any great certainty. It is best to focus on helping your clients, one at atime, hopefully through some of the great programs that Orion offers.

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