RJO FuturesCast

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Which yield curve foretells growth best?

  • Treasury yield curve has turned mildly positive, private sector curve still inverted
  • Private yield curve has been more accurate of the two over the past 20 years
  • Inverted private yield curve might signal slowing growth late in 2020 or in 2021
  • Could booming equities sustain growth and debunk yield curve indications?

The late summer inversion of the US Treasury yield curve raised concerns that the US economy might be heading towards a slowdown, or worse, in 2020.  Investors should therefore be heartened to know that the US Treasury yield curve flipped back to a positive slope in mid-October. 

There is, however, a fly in the ointment.  The public sector yield curve, which we measure by subtracting the rate on 3-month Treasury Bills from the yield on 10-year US Treasuries, isn’t the only, or even the best, yield curve available as an economic indicator.  The shortfall with the public sector curve is that only the US government borrows at public sector rates and yields.  The private sector has its own yield curve, which can be measured by the difference between 10-year swap rates and 3-month LIBOR.  Unlike the public curve, the private sector measure remains inverted (Figure 1). As of November 27, the 3M10Y public sector curve had a 15bps positive slope whereas the 3M10Y private sector curve remained inverted to the tune of 25bps.

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CME Group