It accurately predicted the September 2008 global credit
crunch when it manifested back around July 2007, is the inverted yield curve
the surest sign of a looming recession?
By: Ringo Bones
It managed to trigger an Asian market sell-off during the
start of the Monday, March 25, 2019 trading day after investors were spooked by
the United States’ inverted yield curve of its treasuries. Unfortunately, the
Asian traders’ worries aren’t unwarranted, after all when the so-called “pesky
inverted yield curve” manifested itself back in July 2007 it accurately
foretold the 2008 global credit crunch. Worse still, the Trump Administration
has not been preparing for the predicted looming recession since they set up
shop back in 2017, relying instead on the so-called tax-break driven “MAGA-nomics”
and this – according to the world’s leading economists – could plunge the U.S.
economy into recession by 2020 that could make the 2008 recession look like a
minor economic slowdown. But first, here’s a brief explanation to 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. Usually triggered by a loss of investor
confidence when, for example, 30-year treasury bonds are ditched by investors in
favor of a shorter term 5 or 10-year treasury bonds. This type of yield curve
is the rarest of the three main curve types and is considered to be a predictor
of economic recession. An inverted yield curve is sometimes referred to as a
negative yield curve.
Historically, inversions of the yield curve have come before
many of the United States 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 back around July 2007 before U.S. equity markets
collapsed back in September 2008. The curve also inverted in late 2018 under
the watch of the Trump Administration. An inverse yield curve predicts lower
interest rates in the future as longer-term bonds are demanded, sending the
yields down. Does the Trump Administration have the wherewithal to halt and
reverse the looming U.S. economic recession that could arrive around the last
quarter of 2020 and enact measures so that it won’t become much worse than the
one that happened back in 2008?
