Skip to Content
Skip to Main Menu

Research shows that the inverted yield curve in the American bond market could be indicating a future US recession.

John Williams, President of the New York Federal Reserve Bank, shares his view that the yield curve can be seen as a better indicator of recession over professional forecasters.

The historical pattern of the yield curve runs closely in line with the financial state of the economy.

However, many argue that the closing gap simply mirrors a slowdown of economic growth and it is not necessarily an indicator of recession in itself.

What is a bond yield?

A bond yield is the rate in which interest is paid to bonds investors on an annual basis. The expected result is that a short-term US government bond pays less over the short-term and a long-term US government bond pays more over the long-term for a better return.

The yield is expected to slope upwards as the redemption rate is marked further in the future.

"The inversed slope is apparent when short-term borrowing is brought closer in line with long-term borrowing, which in turn, flattens the yield curve."

What is an inversion?

The inversed slope is apparent when short-term borrowing is brought closer in line with long-term borrowing, which in turn, flattens the yield curve.

In some instances, short-term borrowing can rise higher than long-term borrowing.

The current pattern shows short-term borrowing to be moving closer to long-term borrowing.

In order to test the inversion gap in the US, a comparison is typically conducted between the 10 year US Treasury bond and the 2 year bond.

Current climate of the bond market

The gap is currently down by just 10 basis points, steadily falling since 2016.

As with the collapse of the US sub-prime mortgage market in 2007, another recession across the pond is likely impact countries across the world, likewise plunging them back into a state of recession.

The question remains, is the yield curve foolish to ignore or foolish to obey?

Close Menu