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- An inverted bond-yield curve is widely regarded as the sign of an oncoming recession.
- The US Treasury curve has been inverted for quite a while now – but Goldman Sachs says things are different this time.
- Jan Hatzius, Goldman's chief economist, said "overly pessimistic" economic forecasts have put more pressure on long-term rates than is justified.
For months, investors have been bracing for a US recession, thanks in part to relentless warnings from a market-based indicator with an impeccable track record – the bond yield curve.
It's a graph that plots interest-rate returns on debt securities across maturities – and its inversion, where short-term yields top long-dated ones, is widely regarded as the signal for oncoming economic contraction. Inverted bond-yield curves have successfully predicted every US recession in the past 60 years.
But it's different this time, according to Goldman Sachs.
The US Treasury yield curve has remained inverted for a year now, fueling fervent predictions for a recession. But six months into 2023, the economy looks just fine, as evidenced by a resilient jobs market, rapidly cooling inflation and buoyant equities.
Breaking with consensus, Goldman Sachs chief economist Jan Hatzius said in a note Monday, per Bloomberg: "We don't share the widespread concern about yield curve inversion." The Wall Street bank has lowered its estimate for the probability of a US economic contraction from 25% to 20%.
Hatzius explained that the term premium (the payoff for holding long-term bonds) in the bond market had been much lower than its long-term average, so the yield curve inverted more readily than in the past – and didn't require investors to bet on steep interest-rate cuts for it to do so.
He also thinks that economic forecasts have become too pessimistic, putting excessive strain on long-term rates – creating a self-fulfilling prophecy.
"So the argument that the inverted curve validates the consensus forecast of a recession is circular, to say the least," he said in the note, according to Bloomberg.