The Yield Curve - Future Recession in Sight?

By Christopher Levarek

Recently, 22nd of March 2019, the yield curve relative to 10-year Treasury notes demonstrated a possible shift in the economy. A commonly trusted indicator of a recession, the “inversion” of said yield curve has preceded many a recession.

What is an Inverted Yield Curve?

“An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.

A partial inversion occurs when only some of the short-term Treasuries (five or 10 years) have higher yields than 30-year Treasuries. An inverted yield curve is sometimes referred to as a negative yield curve.

Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in late 2005, 2006, and again in 2007 before U.S. equity markets collapsed. The curve also inverted in late 2018. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are demanded, sending the yields down. “ Source

The economy and investors caught a glimpse of this indicator the 22nd of March 2019 and was reported by the New York Times in the following article: “Stocks Fall as Bond Market Flashes a Recession Warning”.

What does this mean and should I stop investing?

This indicator is just that, an indicator of a possible outcome which has in past history been the case. In fact, according to a Duke University finance professor, Campbell Harvey, in the article by the New York Times, he says “an inversion must last, on average, three months before it can credibly be said to be sending a clear signal. If that does occur, history shows that the economy will fall into a recession over the next nine to 18 months. “

Whether this is the beginning of a recession or not, our advice is keep investing and looking for opportunity to grow your goals, Stay cognizant of the situation in the market, work with trusted partners and do your homework to Invest Smart!