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Millions of investors and traders panicked when yields on long-term government bonds fell below shorter-term bonds producing a condition known as the “inverted yield curve” that’s viewed by many as a recessionary harbinger.
Only the situation is NOT all it’s cracked up to be.
Let me explain.
The yield curve – meaning the difference between short-term rates and long-term rates – has historically been viewed as a barometer for gauging the relative strength or weakness of our economy.
Normally, longer term rates – meaning the 10- and the 30-year notes are higher than shorter term rates. That’s because of the time value of money which implies that you need a higher return in exchange for tying your money up for a longer period of time.
Every once in a while, though, we get what’s called an “inverted yield curve” – meaning that short term rates have risen to be higher than long term rates. That happens because investors and traders place a premium on safety over opportunity.
Inverted yield curves are viewed as a recessionary harbinger because they have preceded every recession over the past 40 years. At first glance, that makes sense against the backdrop of slowing economic growth, Chinese trade concerns, and aggressive central bank action around the world.
My email exploded Wednesday morning when the yield curve inverted and, not surprisingly, the major market averages tanked. So did our phone lines, our chat boards, and our mailbag for that matter.
News headlines, of course, didn’t help:
… Bond markets are sending one big global recession warning (CNBC)
… Yield curves invert in US, UK as “Doom and Gloom” spreads (Bloomberg)
… Recession indicator with perfect track record flashing red (Fox Business Network)
I wouldn’t blame you if you wanted to run for the hills… lots of folks do under the circumstances.