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

Apple unveils 3 iPhone 11 models with new original video services and stars such as Oprah Winfrey, Jennifer Aniston, and Reese Witherspoon.

Joseph Corr

2019-10-13 16:22:00 Sunday ET

Apple unveils 3 iPhone 11 models with new original video services and stars such as Oprah Winfrey, Jennifer Aniston, and Reese Witherspoon.

Apple unveils 3 iPhone 11 models with new original video services and stars such as Oprah Winfrey, Jennifer Aniston, and Reese Witherspoon. Apple releases t

+See More

Apple upstream semiconductor chipmaker TSMC boosts capital expenditures to $15 billion with almost 10% revenue growth by December 2019.

John Fourier

2019-11-11 09:36:00 Monday ET

Apple upstream semiconductor chipmaker TSMC boosts capital expenditures to $15 billion with almost 10% revenue growth by December 2019.

Apple upstream semiconductor chipmaker TSMC boosts capital expenditures to $15 billion with almost 10% revenue growth by December 2019. Due to high global d

+See More

Disruptive innovators compete against luck by figuring out why customers hire products and services to accomplish specific jobs.

John Fourier

2020-05-14 12:35:00 Thursday ET

Disruptive innovators compete against luck by figuring out why customers hire products and services to accomplish specific jobs.

Disruptive innovators can better compete against luck by figuring out why customers hire products and services to accomplish jobs. Clayton Christensen, T

+See More

The global pandemic crisis helps reshape international finance, trade, and technology.

James Campbell

2021-02-01 10:19:00 Monday ET

The global pandemic crisis helps reshape international finance, trade, and technology.

In recent times, the International Monetary Fund (IMF) predicts that the fiscal-debt-to-GDP ratio of most rich economies would rise from 95% in 2018 to 135%

+See More

Japanese prime minister Shinzo Abe outlines the main economic priorities for the G20 summit in Osaka, Japan.

Laura Hermes

2019-07-13 07:17:00 Saturday ET

Japanese prime minister Shinzo Abe outlines the main economic priorities for the G20 summit in Osaka, Japan.

Japanese prime minister Shinzo Abe outlines the main economic priorities for the G20 summit in Osaka, Japan. First, Asian countries need to forge the key Re

+See More

Tony Robbins recommends portfolio optimization only once a year.

Laura Hermes

2017-02-19 07:41:00 Sunday ET

Tony Robbins recommends portfolio optimization only once a year.

In his recent book on personal finance, Tony Robbins recommends that each investor should rebalance his or her investment portfolio *only once a year* to in

+See More