Fact-checking Peter Navarro’s claims that the yield curve is not inverted
On Sunday, White House trade adviser Peter Navarro brushed off concerns of an impending recession. Navarro, known for his outside-the-mainstream positions on economic policy, told CNN’s Jake Tapper that the yield curve was not “technically” inverted last week.
This is what Navarro said:
“Technically, we did not have a yield curve inversion. An inverted yield curve requires a big spread between the short and the long –we had a flat curve that was a weak signal of any possibility. In this case, the flat curve is the result of a strong Trump economy.”
Facts First: Navarro is wrong on two fronts: The inversion did happen, and it’s not a good sign for the economy.
Although the inversion was brief and small, major banks took note of it.
“The 2yr/10yr Treasury yield curve inverted briefly off the back of disappointing global data and remains close to re-inverting. Recession fears have increased,” wrote Bank of America in a note to clients on Friday, with its economists forecasting a 1 in 3 chance of an economic recession in 2020.
The yield curve tracks the interest rates of bonds. It is a way to measure the way investors feel about risk and prospects for US economic growth.
Usually, longer-term loans command higher interest rates than shorter-term loans because investors take more risk with longer-dated bonds and want to be paid more as a result. For example, there’s more risk that a new business goes bust over 10 years than two years.
When investors get nervous about economic growth, something weird happens to the yield curve — it flips (or inverts) so that short-term interest rates are higher than longer-term ones.
Yield curve inversions often signal recessions, which is why economic prognosticators pay so much attention to them.
Last week, an inversion briefly happened for the first time since before the financial crisis along a closely watched part of the yield curve in US government debt: the difference between interest rates on two-year Treasuries and 10-year Treasuries.
Navarro suggested reasons other than fears about a recession sparked the inversion.
But many experts agree this inversion should be concerning.
The yield curve “does not provide us a 100% clear indication of expectations for growth and inflation,” said Mark Cabana, head of US Rates Strategy at Bank of America Merrill Lynch Global Research.
“But it is one of the most reliable market indicators that we have and it’s not sending real warm and fuzzy signals.”
What’s more: Another part of the yield curve already inverted earlier this year. The gap between three-month interest rates and 10-year ones has inverted off and on since late March, according to Bank of America.