3m -10Y =Recession? Fed Funds

Historic evidence suggests 3m trades above 10y = recession in X months or years. I’m not sure the 3m and 10Y forecasts anything as the position of the Fed Funds and Inflation rates must be considered first as both cause the 3m and 10y inversions. The 3m and 10y historically is a late or even no indicator when Fed Funds and Inflation are considered as evidence suggests

1970 Recession

Begin with 1968 = 3m = 5.34 V 10y 5.64. No inversion. Fed Funds rate 1968 = 5.66. Fed Funds 1967 – 1969 = 3.94 – 9.15. Inflation 1967 – 1969 = 2.4 – 5.9.

1969 = 3m = 6.68, 10y = 6.69. No inversion. Fed Funds = 8.21. Inflation = 5.5 average

1970 = 3m = 6.43, 10 y = 7.35. No inversion. Fed Funds = 7.17, Inflation = 5.7 average.

1971 = 3m = 4.35, 10Y = 6.16. No inversion. Fed Funds = 4.67. Inflation = 4.4 average.

1972 = 3m = 4.07, 10y = 6.21. No Inversion. Fed Funds = 4.44. Inflation = 3.2 average.

First Inversion = 1973. Note Fed Funds and Inflation rates. Note the chart 1970 recession. None existed.

1973 = 3m = 7.04, 10y = 6.85. Inversion. Fed Funds = 8.74. Inflation = 6.2 average.

1974 = 3m = 7.89, 10y = 7.56. Inversion. Fed Funds = 10.51. Inflation = 11.0 average.

1975 next recession from charts.

1975 = 3m = 5.84, 10y = 7.99. No inversion. Fed Funds = 5.82. Inflation = 9.1 average.

1976 = 3m = 4.99, 10Y = 7.61. No Inversion. Fed Funds = 5.05. Inflation = 5.8 average.

1977 = 3m = 5.27, 10y = 7.42. No Inversion. Fed Funds = 5.54. Inflation = 6.5 average.

1980 recession. Note again Fed Funds and Inflation Rates.

1978 = 3m = 7.22, 10y = 8.41. No inversion. Fed Funds = 7.94. Inflation = 7.6 average.

1979 = 3m = 10.05, 10y = 9.43. Inversion. Fed Funds = 11.20. Inflation = 11.3 average.

1980 = 3m = 11.51, 10y = 11.43. Inversion. Fed Funds = 13.35. Inflation = 13.5 average.

1981 = 3m = 14.03, 10y = 13.92. Inversion. Fed Funds = 16.39. Inflation = 10.3 average.

1982 = 3m – 10.69, 10y = 13.01. No inversion. Fed Funds = 12.24. Inflation = 6.2 average.

1983 = 3m = 8.62, 10y = 11.10. No inversion. Fed Funds = 9.09. Inflation = 3.2 average.

1984 = 3m = 9.53, 10y = 12.46. No inversion. Fed Funds = 10.23. Inflation = 4.3 average.

Since the 10 year began trading in 1953, and from 1953 – 2010, inversions happened in 4 years = 1973, 1974, 1979 and 1981. And August – December 2006, January to May 2007 and January 2008.

Overall, the 3m and 10 year inversion as forecast to recession doesn’t forecast anything. Main indicators are Fed Funds and Inflation Rates.

Brian Twomey

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