New York.- Wall Street’s most influential recession indicator alarm sounds like nothing has happened in the past two decadesand deepens Investor’s concern Given the possibility that the US economy is heading towards A slowing down.
This indicator is the call “yield curve”It allows you to compare the rates of return on different US government bonds, most notably the three-month T-bills, the two-year and 10-year Treasury bills.
Bondholders generally expect a higher return from their money being tied up for an extended period of time, so interest rates on short-term bonds are lower than those on long-term bonds. When extrapolating the graph, the various bond yields take the form of an upward curve.
But from time to time, short-term rates exceed long-term rates. This negative relationship produces an inverted curve, and indicates that the normal in the world’s largest government bond market has changed.
Every recession in the US in the past 50 years has been preceded by a reversal of that curve, so it’s an ominous sign. This is what is happening now…
The yield curve has a predictive power that other markets do not have.
Last Friday, the yield on the two-year Treasury was 3.23%, up from 3.03% on the 10-year note. Last year, by comparison, two-year returns were one percentage point lower than ten-year returns.
At the time, the US Federal Reserve reiterated that inflation would be temporary and that the central bank saw no need to raise interest rates quickly. Consequently, short-term Treasury yields remained low.
But in the past nine months, the Fed has become concerned that inflation is still in full swing, and has decided to attack rapidly rising prices by rapidly raising interest rates. Next week, the Fed appears to raise the rate again, which will have risen by about 2.5 percentage points from its near-zero level in March, driving up short-term Treasury yields like the two-year note.
For their part, investors fear that the Federal Reserve will go too far and slow the economy to the point of causing a deep recession. This concern is reflected in lower yields on long-term Treasuries, say, ten years, which reveal a lot about investors’ growth expectations.
This tension is also reflected in other markets: so far this year, stocks in the US are down about 17%, due to investors’ doubts about the companies’ ability to withstand an economic recession. The price of copper, a global indicator of its use in many consumer and industrial products, fell by more than 25%. And the US dollar, a safe haven in times of turmoil, is at its highest level in two decades.
The characteristic of the yield curve is its predictive ability, The current recession warning is the strongest since the late 2000swhen the tech stock bubble began to burst and a recession was a few months away.
This recession began in March 2001 and lasted about eight months. When it started, the yield curve had already returned to normal, because policy makers began cutting interest rates to fuel the economy.
The yield curve also predicted the global financial crisis that began in December 2007, initially inverted in late 2005 and continued in this fashion until mid-2007.
This track record has made financial investors notice that the yield curve has inverted again. “The yield curve is not a sacred word, but I think ignoring it is risky”says Greg Peters, co-CEO of investment at PGIM Fixed Income Asset Management.
But which part of the yield curve is important? On Wall Street, the most interesting part of the yield curve is the relationship between the two-year yield and the 10-year yield, but some economists prefer to focus on the relationship between three-month bonds and 10-year bonds.
For most market analysts, whatever you’re measuring at, the yield curve reveals more or less the same thing: it’s an indicator of an economic slowdown. Some researchers and analysts argue that viewing it as a recession signal is overrated.
A frequent criticism is that the yield curve doesn’t tell us much about when a recession will start, only indicating that it’s likely to happen. According to Deutsche Bank data, the average time for a recession to arrive once two-year returns exceed ten-year returns is 19 months. But the duration ranges from six months to four years.
Moreover, the economy and financial markets have changed since the 2008 financial crisis, when the yield curve was last in vogue. The yield curve is a simple way to predict the growth trajectory of the United States and the possibility of a recession. It is reliable but incomplete data.
Translated by Jaime Arambaid