Does the Inverted Yield Curve Signal a Recession?

July 18, 2019

 

The U.S. Treasury yield curve has stayed inverted for nearly eight weeks, and briefly nudged back into the positive territory on Friday. How does this affect your portfolio and the outlook of the economy? As of Monday, the three month treasury bill still sits above the 10-year note yield by seven basis points. While the difference between the short-term maturity and the 10-year yield has narrowed since May 22nd, we are still experiencing an inversion of the yield curve. Now the question is: does the inversion signal a recession? Over the last nine recessions since World War II, investors followed the yield curve closely as an inversion of that spread has historically preceded a recession.

 

However, it is not just about whether the curve is inverted, it is also about how long the curve inverts. The length of time that the short-term yields remain above the long-term returns is worth paying attention for. Now, what does this mean? The length the yield curve lingers in inversion territory can weigh an economic growth because of its corrosive effect on investors' confidence levels. Anyone who's been following the news in monetary policy has confirmed with Jerome Powell’s clear signals that the Central Bank will cut interest rates at its next monetary policy briefing at the end of the month. This was seen by the market as an insurance against further deterioration in the US economy. This optimism that the Federal Reserve will keep the US economy growing has caused the yield curve to steepen in the past week.

 

Meanwhile, the US stock market rose 0.8% while the S&P 500 closed above 3000 for the very first time on Friday. Despite the growing optimism, some investors are still cautious. A lot of what you hear in the news are really along the lines of if it bleeds, it leads. With the low global growth rate, weak economic data, fears over a looming trade war coupled with an elusive inflation rate against a recent dovish shift in monetary policy. There is not a single clear cost or a clear signal for a recession to ensue. The recession indicator is not perfect. I think it is less worrying than what it seems to be on the surface, but neither can it be completely ignored.

 

Successful business leaders are often frustrated by a lack of clear communication from their financial advisors. At Efficient Wealth Management, we’re with you every step of the way so that you can focus on your expertise, confident in the knowledge that you have the right advice and the right team. We wish you the best of investing success.

 

https://www.ft.com/content/c15a3700-a4ea-11e9-974c-ad1c6ab5efd1

 

https://www.marketwatch.com/story/the-longer-the-us-treasury-yield-curve-stays-inverted-the-better-it-predicts-recession-analysts-say-2019-07-09

 

https://www.ft.com/content/66c53f36-8cfa-11e9-a1c1-51bf8f989972

 

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

 

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