US inverted yield curve: Economic recession indicator suggests difficult times ahead
The inverted yield curve is feared by many investors in the world as many claim that it is a signal that a recession in the economy will soon take place. On the other hand, many argue that is “false advertisement” as it is only indicating the movements of long-term bond yields against short-term bond yields. However, as its own is a big indicator of something is happening in the economy. The inverted yield curve and the term spread, the difference between long-term interest rates and short-term interest rates have been indicators of slowdowns in the US economy over 60 years now, and in all of the cases except one, they signaled that recession was coming.
- The yield curve is an indicator of bond investors’ behavior. Meaning that demand for short-term bonds will have a different impact on the yield curve than demand for long-term bonds.
- The most important factors are herding and loss aversion effect, which both are a physiological phenomenon that takes place in the human mind and affects to a great extent the decision-making process of an investor.
- Individual investors are initiators of the inverted yield curve. Meaning that their behavior and their actions dictate which movement the yield curve will take.
- Examines if the inverted yield curve can signal a recession
Reasons to buy
- Does the inverted yield curve signal a recession?
- What is the negative term spread?
- Is the US economy currently under threat?
2.2. The yield curve is an expression of bond investors’ behavior
3.2. An inverted yield curve has a big impact on fixed-income investors, consumers and financial institutions
4.2. The US economy is currently under threat
5.3. Further reading
Figure 2: Yield curve with an downward trend or inverted yield curve
Figure 3: Herding effect in the stock market
Figure 4: The term spread and recessions