The bond market, specifically the yield curve, is a crucial metric for investors and policymakers as it has accurately predicted recessions in the past. The yield curve is a graph showing the relationship between short-term and long-term interest rates of US Treasury notes. Normally, short-term rates are lower than long-term rates, but an inversion occurs when the long-term rate drops below the short-term rate. An inversion of the yield curve has preceded every single U.S. recession for the past 50 years. However, some people question its accuracy due to negative sovereign interest rates in other countries, Federal Reserve policy, or whether watching the yield curve closely has undermined its worth as an economic indicator. Additionally, the yield curve un-inverting does not necessarily mean that the recession fears were overblown.
1. Traders look at the bond market for clues on how the US economy will perform.
2. The yield curve is a graph showing the relationship between short term and long term interest rates of US Treasury notes.
3. A yield curve inversion happens when the long term rate dips below the short term rate, and it is a concern for investors and policymakers as it has been an accurate predictor of recessions in the past.
4. The predictive power of the yield curve was discovered by Arturo Estrella while working with a colleague at the Federal Reserve Bank of New York.
5. The yield curve inversion is not an immediate indicator of a recession, but it does mean the clock is ticking.
6. The inverted yield curve comes along as highly sensitive markets with programmed trading can trigger knee jerk reactions.
7. There are differing opinions on the predictive power of the yield curve, with some considering it a very good indicator while others do not agree.
8. The yield curve can un-invert or re-steepen even before a recession begins, and its behavior can deviate from historical patterns due to the complexity of the economy.