Yield Curve Inverts, Raising Recession Fears

Chris Gaetano
Published Date:
Aug 14, 2019

Yields on 10-year Treasury bonds are now less than those of two-year bonds, a dire omen that has historically preceded economic recessions, according to CNBC. This circumstance inverts traditional understandings of the bond market, as it indicates that it's better to loan the U.S. government money over the short term rather than the long, when generally it has been the opposite. In each of the last five times this has happened, a recession has followed an average of 22 months later. Overall, seven of the last nine recessions since World War II have been preceded by a yield curve inversion. 

This development has fed already brewing fears of recession. Bank of America, for instance, recently upgraded its probability of recession from 1 in 5 to 1 in 3 due to the ongoing trade war with China. This prediction is roughly in line with the results of a recent poll of professional economists, which gave a 35 percent probability of a recession within the next 12 months. Meanwhile, analysts from both Morgan Stanley and Bank of America Merrill Lynch previously said that the 10 percent tariffs announced by the White House will slow global growth, but if they ever reach 25 percent, the global economy could see a recession within nine months.

The United States is not the only country at risk of recession. CNN reports that many of the world's largest economies are experiencing factors that put them at risk for economic havoc. The United Kingdom's economy shrank in the second quarter this year, Italy has seen flat growth, Mexico just barely dodged a recession, Germany's economy contracted for three months, Brazil is already in a recession, and China's economy is growing more slowly than it has in three decades. 

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