Little Concern About Inverted Curve

Nasri Toutoungi, portfolio manager for the (ITBBX Quote)Hartford Total Return Bond Fund, believes foreign interest is worth 50 to 75 basis points on the longer end of the curve. He is looking for inversion in the near future of 10 to 15 basis points between the two- and 10-year Treasury bonds. Or, in other words, with the 10-year yielding 4.49%, a reversal of more than 20 basis points from current levels.

But would that be enough of an inversion to bring about a recession, proving once again that inversion leads to a downturn? Toutoungi doesn't believe so.

Why? Because, of course, this time it's different.

"In past episodes, the overall level of rates has been 6% or higher," says Toutoungi.

When Inversion Matters

If the nearly unanimous opinion of bond fund managers is correct, and the recent inversion is not the exception that proves the rule, when would a curve inversion lead to an economic downturn?

According to Bob Gahagan, director of taxable bond investments for American Century funds, investors would have to see 10-year Treasury yields at least 50 basis points lower than two-year yields before the Fed would induce a hard landing and potentially a recession.

"I don't think the Fed will overtighten. They have a good grasp on things," says Gahagan, who views a housing collapse as the biggest macro risk to the economy when the yield curve eventually steepens.

"If the refi phenomenon is more extensive than people think, then a big jump in rates could have bigger reverberations than people realize," says Gahagan.

And considering the short-lived nature of the most recent inversion, how long should investors wait before stressing over an inverted curve that refuses to reverse itself?

Mitch Stapley, chief fixed-income officer for Fifth Third Funds, says a curve inversion lasting six months would be the cue to hit the panic button.