An almost infallible recession indicator is flashing red; we are seeing an inverted yield curve!
The whole issue of “yield curves” is a bit technical, and very boring. However, there are reasons why we are talking about it.
First of all, what is the yield curve? Well, if you were looking to fix your mortgage rate, you would normally expect to get a lower rate over two years, as opposed to ten years, because there’s more certainty for the lender over what’s happening in the near future, then trying to predict ten years ahead.
It’s the same with government bonds, and other debt instruments, a two year bond will yield you less than a ten year bond.
So, if you plot these figures and dates on a graph, you will see an upwards-sloping curve.
However, that’s not happening now. The curve is flattening, which means that investors are betting that future interest rates will be lower that they are now, because they expect central banks to cut rates to combat falling growth.
It won’t take much for the curve to invert. Why does that matter? Because every US downturn (and hence the world), has been preceded by…….you guessed it, an inverted yield curve! In fact the last time it was seen to be like this was 2007, and we all know what happened after that. And have things really improved since then? Arguably not (more on that later).
Now, if you add to this the brewing cocktail of issues and potential flashpoints around the world, such as Trump’s rampage, Israeli/Iranian frictions, Brexit, asset bubbles, the unwinding of quantitative easing, the Russian election meddling probes in the US, and the Italian debt crisis, (to name but a few), you can see why concerns are mounting.
Watch this space…….!!