Treasury bond yield curve inversion often signals the next economic recession in America.

Monica McNeil

2018-10-11 08:44:00 Thu ET

Treasury bond yield curve inversion often signals the next economic recession in America. In fact, U.S. bond yield curve inversion correctly predicts the dawn of an economic recession every time since the 1970s. The term spread is the difference between the 10-year Treasury bond yield and the 2-year Treasury bond yield. The Treasury yield curve inverts when this term spread falls below zero or the short-term government bond yield exceeds the long-term bond yield. In this rare situation, investors bet on short-term reinvestment risk in exchange for less risk exposure to highly volatile long-term bond prices.

These higher long-term bond prices translate into lower long-term bond yields and thus result in government bond yield curve inversion. In this rare event, investors prefer to roll over their short-term bonds with substantial interest rate risk instead of having to keep their capital in long-term bonds that exhibit volatile price gyrations.

Low long-term bond yields suggest that these subpar rates of bond return cannot be commensurate with long-term risk exposure. In effect, sound economic intuition suggests that this rare situation dampens both nationwide capital investment and even household consumption as the ripple effects manifest in real GDP economic growth protraction.

U.S. economic history shows that it takes about 10 months for government bond yield curve inversion to reach the stock market peak plus another quarter until the next economic recession. A recent Forbes article discusses empirical evidence in support of the view that if U.S. bond yield curve inversion happens in December 2018, we would expect the current bull market to peak in September 2019. In this worst-case scenario, the U.S. economy may move into a new economic recession in February 2020. Whether this key scenario takes place in reality depends on how well the Trump administration maneuvers fiscal stimulus to help reinvigorate both macroeconomic output expansion and productivity growth.

The Trump team needs to consider how the current trade tactics and interest rate increases can induce the U.S. economy to derail off the steady-state growth path. New York Fed CEO John Williams and Fed Governor Lael Brainard admit that U.S. Treasury yield curve inversion can be a powerful indicator of the next recession.  However, both Williams and Brainard point out that *this time is different* because the U.S. economy gradually recovers from the zero lower bound of interest rates in recent years.

 


If any of our AYA Analytica financial health memos (FHM), blog posts, ebooks, newsletters, and notifications etc, or any other form of online content curation, involves potential copyright concerns, please feel free to contact us at service@ayafintech.network so that we can remove relevant content in response to any such request within a reasonable time frame.

Blog+More

The International Monetary Fund (IMF) appoints Harvard professor Gita Gopinath as its chief economist.

Dan Rochefort

2018-10-09 08:40:00 Tuesday ET

The International Monetary Fund (IMF) appoints Harvard professor Gita Gopinath as its chief economist.

The International Monetary Fund (IMF) appoints Harvard professor Gita Gopinath as its chief economist. Gopinath follows her PhD advisor and trailblazer Kenn

+See More

The Trump team now aims to make progress on health care, infrastructure, social welfare, and immigration.

Monica McNeil

2018-01-06 07:32:00 Saturday ET

The Trump team now aims to make progress on health care, infrastructure, social welfare, and immigration.

Subsequent to the Trump tax cuts for Christmas in December 2017, the one-year-old Trump presidency now aims to make progress on health care, infrastructure,

+See More

Capital structure theory and practice

Jonah Whanau

2022-03-15 10:32:00 Tuesday ET

Capital structure theory and practice

Capital structure theory and practice  The genesis of modern capital structure theory traces back to the seminal work of Modigliani and Miller (1958

+See More

To secure better E.U. economic arrangements, Jeremy Corbyn encourages Labour legislators to back a second referendum on Brexit.

Olivia London

2019-06-17 11:25:00 Monday ET

To secure better E.U. economic arrangements, Jeremy Corbyn encourages Labour legislators to back a second referendum on Brexit.

To secure better economic arrangements with European Union, Jeremy Corbyn encourages Labour legislators to back a second referendum on Brexit. In recent tim

+See More

Donald Trump and Kim Jong Un meet, talk, and shake hands in the historic U.S.-North-Korean peace summit in Singapore.

Daphne Basel

2018-06-06 09:39:00 Wednesday ET

Donald Trump and Kim Jong Un meet, talk, and shake hands in the historic U.S.-North-Korean peace summit in Singapore.

Donald Trump and Kim Jong Un meet, talk, and shake hands in the historic peace summit between America and North Korea in Singapore. At the start of the bila

+See More

U.S. automobile and real estate sales decline despite higher consumer confidence and low unemployment as of October 2018.

Fiona Sydney

2018-10-27 09:34:00 Saturday ET

U.S. automobile and real estate sales decline despite higher consumer confidence and low unemployment as of October 2018.

U.S. automobile and real estate sales decline despite higher consumer confidence and low unemployment as of October 2018. This slowdown arises from the curr

+See More