One of the most scrutinized predictors of a possible recession just squeaked even louder.
The pointer lies in the bond market. The investors show how interested they are in the economy by the rate in which they want the US government bonds. It`s known as the yield curve and for the first time on Friday a significant part of it flopped.
A treasury bill which is supposed to mature in three months is yielding at a higher rate than the yield of a treasury which is set to mature in ten years. This seems illogical, and economist refers to it as an inverted yield curve.
In simple terms, a short term debt is supposed to yield less than a long term debt which entails investors to invest their money for a long time. In a case where a diminutive term debt gives more money as compared to long term debt, the yield curve is said to be inverted.
When the yield curve has upturned, it confirms that the investors are losing trust in the economy’s prospects.
Why You Should Be Concerned
This warning sign of an inverted yield curve has a past track record. It is expected that when the ten-month treasury yield is lower than the three-month yield a downturn is most likely to happen in less than a year.
According to past records, the last time a 3-month treasury generated less than a 10-month treasury was at the end of 2006 and beginning of 2007, before there was a great recession which happened at the end of 2007.