The yield curve is a financial foghorn of sorts. Currently, it is bellowing that something is drastically wrong. As evidenced by earnings growth estimates for 2023, financial skippers are going about their business as if a recession is unlikely.

Yield curve foghorns are often unheeded by investors as they blow well before danger is apparent. As such many investors are unprepared when problems arise.

Today, the 10-year/3-month UST yield curve is at its most negative level since 1982, as we share below.

The blast of the financial foghorn is deafening, but the financial waters and economic environment appear relatively calm.

Given the strong possibility that history repeats and the yield curve correctly portends danger, now is the time to examine how and when the yield curve will un-invert, or steepen, and what that might mean for asset prices.

In this article, we use the terms un-invert and steepen interchangeably to describe the yield curve rising from a negative value to a positive one.   

The Market's Foghorn

An inverted yield curve, whereby the yield of a shorter maturity bond is higher than a longer maturity bond, is an omen that something is wrong. Yield curves are often positively sloped. In free markets, investors should receive a higher yield for taking on the potential risks that grow with time. Since 1986, the 10yr/3m yield curve has been in a state of inversion less than 5% of the time.

The three graphs below show why an inverted yield curve is a foghorn worth following, even if the current environment doesn't appear too worrisome.