Published: June 03, 2019
I view the YC in two ways. First, the 3s (mth) / 10s (yr) or the traditional bank lending spread where we are now more firmly inverted (-17 bps). To be clear this doesn't have to mean it'll stay this way. We've bounded around between slightly negative / slightly positive for some time. So we'll see where this goes. (History tells us that we'd probably need to see a more steeply inverted spread and for longer to draw any conclusions about the economy).
Second, the 2s (yr) / 10s (yr) or the non-traditional finance space (funded by market rates and liquidity, not bank deposits) where we are seeing +18 bps of positive spread (hasn't gone negative yet in this cycle).
The two are sending conflicting messages, perhaps suggesting that the availability of money is likely to lessen but not shut down. So maybe it's reasonable to expect an economic slowing vs. recession.
Since the inversion is only present in the curve's "belly", I suspect this also may mean markets believe the Fed made a mistake in Dec. Add to this some technical factors (German yields negative, Japan, etc.) and it makes sense to think that market liquidity is seeking more return in U.S. Treasuries in short / medium-term duration securities.