The inverted yield curve – or why the American economy might be heading for a recession (followed by the world economy of course)

“Every recession of the last 60 years has been preceded by an inverted yield curve. The term is off-puttingly wonky but it just means investors see trouble ahead.

There’s some argument that the oracular power of inversions ain’t what it used to be thanks to the aggressive monetary policies that have been pursued by central banks around the world.

US treasury bonds are regarded as safe investments. Usually investors expect higher returns for tying their money up in long-term bonds than they do for short-term bonds. When long-term bonds offer lower interest rates than short-term ones, the yield curve has inverted.

This week yields on the 10-year treasuries fell below two-year yields for the first time since 2007. Looking at yield curves, the New York Fed now puts the probability of a recession by July 2020 at 31.5%– close to one in three.

But Gus Faucher, PNC bank’s chief economist, still sees inverted yields as “a very reliable indicator”. Faucher is betting on a slowdown rather than a recession next year but either way he argues inverted yield curves are bad news.”

Quote from today’s “Observer” newspaper


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