(Bloomberg) -- The US yield curve is one of the most reliable leading indicators for recessions. Yet Goldman Sachs Group Inc. strategists think it’s misleading this time around. And with two-year Treasury yields now almost 100 basis points above those on 10-year bonds, that really matters. 

Should investors be worried? Or are the Goldman Sachs strategists correct to argue there’s little cause for concern? Here’s what Markets Live’s bloggers think:

Edward Harrison:

  • Bond market recession indicators, like an inverted yield curve, aren’t predictive of recession. Rather, they are predictive of the Fed’s reaction function to incoming data. The inversion is a sign of economic vulnerability more than a predictor of recession. In today’s context, where consumer wherewithal has been bolstered by unprecedented monetary and fiscal stimulus, one could legitimately argue that inversion isn’t as reliable as it has been over the past several decades, simply because it will take a lot more tightening to turn recent economic vulnerability into recession.

Simon White:

  • Yield curves are a red herring when it comes to recessions. Their excellent track record is often highlighted, but the variation in the time between their inversion and the recession is too large to be of any practical use to an investor. It is true, as Goldman points out, that when term premium is low, yield-curve inversions are more likely, but the fact of the matter is they are neither necessary or sufficient for a recession. Instead, a much broader suite of indicators is required to make timely and accurate recession predictions. On that basis, one is more likely than not, in contrast to Goldman’s view of a 20% chance of a downturn in the next 12 months, even if the likelihood is rising it will be mild.

Eddie van der Walt:

  • The conditions that gave rise to curve inversion this time are unique, in that a global pandemic gave way to a supply shock which spurred cost-push inflation. Base effects, falling producer prices and increased labor participation rates are now creating a dis-inflationary environment. Lower inflation later means lower term premiums, hence the inversion. Looking forward, falling near-term yields will likely be the result of lower inflation, and doesn’t have to be tied to stalling growth. So the curve can re-steepen while the Fed pulls off a soft landing, breaking the yield curve’s perfect record in forecasting recessions.

Ven Ram:

  • Goldman’s argument on lower term premiums implying fewer rate cuts having led to the curve inversion is irrefutable. What it also means is that we are likely to stay in curve inversion for longer before we get a recession. This has echoes of the cycle before the financial crisis, when the curve inverted about two years before the actual economic contraction.

Mark Cranfield:

  • This time there won’t be the demand destruction seen in some major slowdowns. That suggests it’s more about locking in relatively high long yields than predictions of recession.

The weight of opinion, on the blog then, seems to be heavily skewed to agreement with Goldman — that an oversimplification of the meaning of an inverted yield curve is not helpful. The conclusion the bloggers draw from that, though, varies widely.

  • NOTE: The commentators are editors and strategists on the Markets Live Blog. The observations are their own and not intended as investment advice. For more markets commentary, see the MLIV blog

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