The U.S. is currently seeing an inverted yield curve, a sign which many say points to the inevitability of a recession.
First things first – what is an inverted yield curve?
It gets down to the basics of investment. When you invest for the long-term, you expect to get a higher return on your investment.
The inverted yield curve happens what the shorter-term U.S. Treasury notes, like the two-year or three-month notes, produce a higher ROI than the 10-year Treasury notes.
When looking at it on a graph, the yield curve should be curving up, but in these instances, it flips over and looks more like a dome. That’s what is happening now. And many fear that it means a recession is imminent.
This is because when investors get worried about the economy for the short term, they often flee from the short-term yields and look to lock in more long-term investments.
So what are investors worried about now? The U.S. and China trade war, a no-deal Brexit, the list goes on.
In fact, the Group of Seven summit, an annual meeting of seven countries with the most advanced economies in the world, ended in chaos. The G7 summit, which included Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S., failed to come to a consensus on many key issues.
World leaders are at an impasse on what to do with climate change, Russia provocation, Iranian nuclear deal, trade wars and more.
And many fear these uncertainties could lead to a recession. In fact, At the end of its most recent July meeting, the Federal Reserve cut its benchmark rate by a quarter percentage point in a bid to keep the longest economic expansion in U.S. history from petering out. It was the first reduction since the financial crisis more than a decade ago.
However, a recession may not be imminent.
The chart below, circulated to subscribers by Brent Nyitray, former director of capital markets for iServe Residential Lending, shows that the U.S. yield curve is actually ahead of many other countries, some of whom are trading at negative rates right now.
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Nyitray explained that those fearing the inverted yield curve predicts a recession, “inevitably ignore the fact that US bonds don't trade in a vacuum and investors will sell negative yielding bonds to buy something positive.”
And, despite all of this, Americans are brimming with assurance about the economy and the labor market, according to the Conference Board’s index released on Tuesday. The gauge of present conditions jumped to 177.2 in August, the highest reading in almost 19 years.