🔒 Key recession indicator flashing red – The Wall Street Journal

DUBLIN — Predicting the next recession is, obviously, a fool’s game. But it’s still worth keeping an eye out for signs that there are storms ahead. While the US economy is currently thriving, there have been a number of warning signs in recent months. For example, the housing market is cooling, especially in big cities. And stocks have struggled to maintain their momentum. Now, a key recession indicator is flashing red and seems to be one the verge of hitting solid red – the yield curve. As this article discusses, an inverted Treasury yield curve has long been a predictor of recession ahead (although sometimes it takes a pretty long time to arrive). Recently, the yield curve has been threatening to invert. A US recession would be very negative for South Africa. The US has powered the global recovery, and if its momentum stutters, we can probably expect to see emerging markets sold off as investors flee to safety. – Felicity Duncan

Flatter Yield Curves Aren’t Always Bad News — but This One Is

By Mike Bird

Treasury market moves are sending a menacing signal about the economic outlook.
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U.S. government bonds are on the edge of a yield-curve inversion, where shorter-dated bonds yield more than longer-dated ones—and recent moves carry a particularly bearish tone.

The yield curve reflects market expectations for how fast the Federal Reserve is likely to raise interest rates, based on expectations for economic growth and inflation.

An inverted curve—short-dated bonds offering greater nominal returns than their longer-dated peers—is often interpreted as a signal of a looming recession. But there are different ways to interpret a flattening curve, depending on how it comes about.

For most of this year, both short- and long-term bond yields rose as government bond prices fell across the board. However, yields on bonds due in less than two years rose quickest. The pattern indicated both the short- and long-term growth outlooks had improved, leading investors to expect more interest-rate increases both now and in the future.

That is no longer true. Now, the yield curve is closer to inverting not because short-term economic indicators are improving, but because longer-term rate expectations are falling.

This quarter, yields on longer-dated bonds have dropped and those on two-year Treasurys are flat. The gap between two and 10-year Treasury yields is now around 0.11 percentage point, compared with around 0.55 percentage point at the beginning of the year.

“When it comes to an inverted yield curve, anyone who ignores its economic message should do so at their own peril,” said Paul Hickey, co-founder of Bespoke Investment Group. “As far as the market signal and the ultimate timing of any downturn that follow an inverted yield curve is concerned, things are a lot trickier.”

The Dow Jones Industrial Average fell nearly 800 points and bond yields plummeted on Tuesday as investor doubts over the U.S.-China trade truce renewed anxieties about the pace of economic growth.

Write to Mike Bird at [email protected]

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