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The yield curve rightly predicted the previous seven US\nrecessions. And it is about to wave the red flag again. Though stock markets\nmay indicate record price highs the yield curve prediction of a recession should be considered more stable and\naccurate. <\/p>\n\n\n
What Does The Yield Curve Indicate?<\/strong><\/p>\n\n\n The plot of the yield curve tracks the short term bond rates, for\nexample, the 2-yr Treasury yields versus the ten-year rates. The current 10-yr\nyield is at 2.98% lagging the 2-yr rates of 2.62% by a mere whisker of 0.36%.\nSuch narrow differences have never been noticed\nfor over a decade. How Will It Impact The Bonds?<\/strong><\/p>\n\n\n Ideally, a healthy economy is indicated\nwhen the long-term bonds yield more than short-term bonds. The bonus of a\nhigher rate for savings and investments in the long-term Treasury bonds means\nlack of access to funds for more extended\nperiods of time and this is made up for\nby offering higher yield rates. Both the investors and the Treasury are in a\nwin-win situation with liquidity for the treasury and a better yield for the\ninvestor. <\/p>\n\n\n When the yield curve is moving towards inversion investors, have no impetus for saving in\nlong-term Treasury bonds because of the falling interest rates. It is quite reasonable\nthat during a recession period interest rates will fall. Factors like less\ncompetition for borrowed money, weak business environment, fewer home buyers\nand fewer industries investing in machinery and equipment also contribute for\nsuch fall in yield prices.<\/p>\n\n\n It is not the contribution of the financial markets alone that has\nled to this situation. The Federal Government has added to the woes of the\ncurrent situation by hiking the yields on short-term bonds twice in the fiscal\nyear. Thereby the government hopes to curb inflation. But Wall Street and the bearish\nfinancial markets have held-down the rates of the long-term bonds due to weak\ngrowth on the economic front. Working in tandem,\nthe two-dimensionally opposite actions has led to a flat curve which will lead\nto the inversion of the curve if the Federal Government hikes the short-term\nrates twice more in this year as anticipated.<\/p>\n\n\n How Will It Impact The Stock Market?<\/strong><\/p>\n\n\n The yield curve is yet to invert. In reality, the flatter curve is\na prediction of the slowing down of economic growth. A recent study by\nBMO-Capital-Markets showed that when the rate difference fell to below 0.5% and\nthe yield curve did not actually invert\nthere was no major impact on the stock\nmarkets. It also showed that stocks bettered their performance during the flat phase rather than when the rates drew\napart steeply, and the curve rose to\nindicate the same. What Can You Do?<\/strong><\/p>\n\n\n Check your risk levels in your portfolio and ensure your\nbond-to-stock ratio is a balanced risk. Don\u2019t worry about the recession. Cut\nyour losses with a better 50 to 50 spread over bonds and stocks. It is a red\nflag and caution is advised. Though hopefully, the recession will not be as bad\nor severe as the previous one. Wait it out and play safe.<\/p>\n","protected":false},"excerpt":{"rendered":" The yield curve rightly predicted the previous seven US recessions. And it is about to wave the red flag again. Though stock markets may indicate record price highs the yield curve prediction of a recession should be considered more stable and accurate. What Does The Yield Curve Indicate? The plot of the yield curve tracks […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_mo_disable_npp":"","_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[22],"tags":[108],"class_list":["post-133651","post","type-post","status-publish","format-standard","hentry","category-finance","tag-capital-market"],"acf":{"ls_key":"PG Banking and Finance"},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t
\nWhen the yield curve inverts, it spells huge problems as it indicates the short term\nbond rates are better than the long-term rates. It is this change that marks a\nrecession and has been the precursor of the last seven US recessions. With the\ngap nearing inversion it could only spell a recession\nin a year\u2019s time as has occurred in all\nseven instances before.<\/p>\n\n\n
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