What does an Inverted Yield Curve Mean?

But in economics, things aren’t always normal. Every so often, that yield curve flips upside down, with short-term bonds posting higher yields than long-term bonds. The yield curve flipped in 2005/2006 as well as in 2000, 1988 and 1978, prefiguring the recessions that followed in the next year or two. And historically, when that happens, a recession is imminent. This gets to the self-fulfilling prophecy part. So why exactly does the yield curve turn on its head?

Also, when capital is tight, businesses shelve new projects, freeze hiring or even lay off employees to cut costs. When workers are nervous that they’re going to lose their jobs, they’re less likely to buy cars or build new houses. Slowly but surely the economy loses steam, Condo for sale Singapore – sneak a peek here – unemployment grows and we’re back in a recession. Blokland notes that an inverted yield curve doesn’t mean that a recession is arriving tomorrow, but the odds of one coming are high.

Jeroen Blokland is the founder of True Insights, an independent investment research platform focusing on global multi-asset portfolios. He also believes the Federal Reserve System was too far behind the curve in thinking that the current high rate of inflation would be temporary. He says one of the reasons for concern is because inverted yield curves have forecast the last six recessions. Most of the time this signals lower, not higher longer-term bond yields, and often a recession. If the yield hits the neutral rate, which is somewhere around 2.5 percent, it will start to impact gross domestic product growth, Blokland says. Blokland says via email.

So what does this mean for the average investor? Ironically, he says, risky assets and equity markets, in particular, tend to go up just until the recession arises. Economic recessions pale in comparison to legit depressions. And the increase between yield curve inversion and recession is significant. If too many think that the economy might fall into a recession and start moving their money into other places, that could fuel the self-fulfilling prophecy. During the Great Recession of 2007-2009, the economy contracted by only 5 percent and unemployment jumped from 5 percent to 10 percent. During the Great Depression, the gross domestic product fell nearly 30 percent and unemployment spiked from 3 percent to nearly 25 percent.

On Aug. 14, 2019, the yield on the 10-year Treasury note was 1.4 basis points below the two-year note, causing a massive drop in stock market prices. So why does an inverted yield curve have recession watchers so worried? What Does An Inverted Yield Curve Mean? Because it’s a sign of lagging investor confidence that can have real effects on the flow of money into the economy. By Aug. 16, 2019, the curve was no longer inverted and the stock market climbed.