Does an Inverted Yield Curve Mean a Recession Is Coming?

[andhrabullet]

By one measure, the yield curve inverted on Monday: The interest rate on five-year Treasury bonds slipped below the rate on three-year bonds. That’s a worrying sign because rates on longer-term bonds are typically higher than those on shorter-term bonds, and such inversions are associated with recessions.

 

 

So far, however, I would consider the yield curve only “partially” inverted. A full inversion would be when interest rates on two-year Treasury bonds rise higher than rates on 10-year bonds. In the last 40 years, each time this has happened, the U.S. economy has entered a recession soon afterwards.

 

 

 

 

This makes an inverted yield curve the most reliable indicator macroeconomists have for predicting a recession. The last two times the yield curve inverted, in 1998 and 2008, the debate among economists was whether this time would be different. In both cases, it wasn't.

 

 

 

As I write, the interest rate on two-year Treasury bonds is just above 2.8 percent while 10-year Treasury bonds are just below 3 percent. This is the closest they have been since the Great Recession ended. Does that mean that the U.S. is on the verge of recession?

 

 

My answer: yes, probably. But, as with so much else, a lot depends on how the Federal Reserve reacts.

 

When it meets next week, the Fed is widely expected to raise its target interest rate again, to 2.5 percent. This rate, known as the federal funds rate, is the shortest term interest rate in the economy. It’s the rate banks charge each other for loans that last from the close of one business day to the opening of the next. These loans help ensure that banks have enough funds available to process any payments authorized the previous day.

Raising this rate puts pressure on other short-term interest rates. December’s increase is largely already priced into the interest rate on two-year Treasury bonds, so it alone won’t be enough to push the economy into recession. What really matters is how the Fed responds to the yield curve and other key macroeconomic data over the next few months.

While almost all economists agree that a yield curve inversion signals a coming recession, they are divided on why. The mainstream view is that the yield curve inverts because the markets expect the Fed to cut interest rates once the economy starts to slow down. Traders want to lock in relatively high rates now so that they will be protected from future declines. This makes sense: Investors wouldn’t purchase 10-year bonds that paid a lower interest than two-year bonds if those same investors thought interest rates were likely to rise.

[Peddayana]

already 30% loss ikkada , ippudu malli recession ante may be 80% loss ki velthamu emo stocks lo

[Sreeven]

Housing market slow aindi..aina last quarter lo housing slow avutundi

[Android_Halwa]

March-August 2019....last two years manchi growth vunde....next march nundi kastha kastame...downward spiral avochu

[greensboro]

Anni companies lo layoffs start aynayi man.  Thomson reuters,ford,monsanto lo heavy layoffs authunnayi. Next year banks lo layoffs untayi. Cash save chesukondi.

[Staysafebro]

Applying for visa to AP as we speak. Last recession kicked back to India. Now going to the great country of AP.

[Android_Halwa]

isari recession vasthe, vachinatu kuda kanipiyadu....just to realise there is a slow down, it would take few quarters...

fichal fack ae isari

[Sreeven]

2020 varaku eam vundadu..2021 nundi start avutundani market analysts analysis