The spread of the bond yield curve has taken another step towards recession

The 10-year US Treasury yield declined for the fifth week in a row, making the US economy one step closer to the recession. A contraction in America would hurt growth across the planet.

Treasury bill rates do not automatically trigger recessions, of course.

But there was a disturbing historical correlation between the percentage yield on the two-year Treasury becoming greater than the return on the 10-year note. This phenomenon is called a "reversal of the yield curve", which means that investors are so worried that they are less likely than normal to bet on short-term assets.

In simple terms: The obligations concern investor security. If you buy a two-year ticket, you can be reasonably sure that you will receive your money in two years. Two years is not very far, after all. The short term is easier to predict than in the long run. Thus, the returns (the amount you get back) are lower for short-term bonds, because the risk is lower and, therefore, the reward is also lower.

Ten-year notes represent the reverse bet. They are riskier because who knows what will happen in 10 years? Returns on long-term bonds are therefore higher because there is more uncertainty until you get your money back.

When the opposite happens – and investors point out that the short run is riskier than the long run – something must be wrong. If investors say that they have less idea of ​​what will happen in two years than ten years, then they have to be very worried in the short term – and that's a very good sign of it. 39, an impending recession.

When the two years are over the age of 10, recessions tend to follow quickly.

This FRED graph shows it best. We are closer to a reverse yield curve than at any time since 2005-2007, just before the great financial crisis of 2008:

At present, we are still above the zero percent difference line. But only right. The yield curve is flattened, not reversed. We are trading at 25 basis points on Monday, the flatter since 2007.

There is a reason not to panic. The rate curve does not say that a recession will come imminently . Just … sometimes soon . Macquarie analyst, Ric Deverell, and his team recently told clients that even if the curve was reversed, a recession might not manifest until 2019, according to the historical: "

" Historically, the term spread was one of the best indicators.an upcoming recession … In fact, each of the five most recent recessions was preceded in two years by an 'inverted' yield curve, with a only false signal (the yield curve very briefly plunged into negative territory in the middle of 1998, Russian crisis and the collapse of Long Term Capital Management, about 33 months before the cyclical spike). 19659014] "On average, the lag between the inversion of the yield curve and the beginning of a recession is about 15 months … Even though the current trend of the current year, it is still not enough. flattening persists since 2014, the curve would only reverse in the middle of 2019. "[19659004] The global economy does not seem to be facing a recession – there is widespread GDP growth in the US, Europe, Asia and China. Nevertheless, the current expansion is one of the longest ever recorded and the economy tends to follow cycles of expansion and recession. We have to make a bust, frankly.

There is another big difference between today and 2005: central banks around the world have been buying bonds like crazy for almost 10 years to keep interest rates low and fuel the economy. 39 economy through "quantitative easing". This artificially reduced bond yields, and this means that this period around the yield curve is not the reliable predictor of the recession that it was. This is the position of UBS economist Paul Donovan, for example.

Of course, when smart people start saying that a recession will not happen because "this time it's different," it's also an indicator of a recession imminent.