There has been considerable discussion lately about the slowly inverting yield curve and what it may signal for growth prospects going forward. Commonly used as a proxy for the yield curve is the spread between 10-Year US Treasury yields and 2-Year US Treasury yields. As of this writing, the spread is 24bps, having compressed by 2bps today after Fed Chair Powell’s presentation.

Most observers look at the chart below and conclude the yield curve is on the cusp of inverting—after maybe one more rate hike in September—and from there the clock is ticking on when the economy goes into a recession.

If there is one thing I’ve learned over the course of the last decade, it is that many things are not quite what they appear to be in the US Treasury market. In the next chart, I show the standard 2-Year US Treasury yield which has been rising since 2014 in anticipation the current tightening cycle.

But, there is a key piece missing in this analysis. Term premiums—which historically are positive, compensating investors for unexpected pops in inflation—are negative after trillions of dollars of quantitative easing. In fact, this is the main channel through which Fed asset purchases have impacted the US Treasury market. In the chart below, I show the ACM term premium for the 2-Year Treasury, which is -28bps.