Lets take a look at the spread between the 10-year and 2-year yield in the past, and how it has historically been a very accurate sign of a recession once the spread goes to 0 or becomes inverted.
While the spread is not at 0 or inverted, it is getting very close at only 13bp. which is a sharp decline in just the past few days. Typically the recession occurs in the next year or two, which is aligned with some economists belief that we will see a recession in 2020. Why is this a good recession indicator? In this 2018 scenario, an investor would get paid a higher rate of return to have their money tied up for 2 years, rather than 10. And when short-term rates are higher, it typically slows the economy. The inverted curve is a symptom, not a cause of a recession. Higher short term rates slows the economy, while on the other end, lower long-term rates typically signal a weakening economy and can be deflationary. This would include price cuts and businesses doing poorly. For these reasons, an inverted curve is often times a reliable indicator of recession. And when businesses slow, the first thing they do is let people go. This is why we look for the bottoming of the unemployment rate and why a consistent spike in Jobless Claims can be a sign as well.
The attached Yield Curve reflects the last three economic cycles. The red areas are the inverted curve timeframes, and the gray areas the subsequent recessions.
Mortgage rates track the direction of the 10 year note. As can be seen on the chart of the 10 year note the long side of the rates have dropped over 30 basis points. That puts us to the same range that we were at in August, before the big run up over the past few months.
We’ll see what happens at the next Fed meeting December 18-19. Another 1/4% hike in the Fed Funds Rate is already baked in the numbers, but we’ll see what the Fed’s position will be going forward. They signaled in the past 3 more hikes in 2019. The basic economic numbers are still solid, but considering what the rates are signaling, and the volitility in financial markets, and real estate slowdown… we’ll see…
Note: 30 year mortgage rates are down, but adjustable rates applicable to motgages, credit cards etc, are still going up. Debt consolidation, or refinances into fixed are always worth evaluating.
If you are in the Los Angeles area, have any questions or real estate sales or financing needs, feel free in contacting me.
Ron Henderson GRI, RECS, CIAS
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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