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Decoding a massage from the markets: yield curve inversion
By admin February 14, 2020

On Tuesday evening, February 4th, President Trump delivered his third State of the Union address in front of Congress. While noting economic achievements, among them, is the U.S.-China “Phase One” trade deal that had induced a wave of optimism amongst analysts across the political spectrum. However, amid celebrated achievements, the markets delivered a very different announcement:  earlier this week, the yield curve was inverted. 

 

Defined as the spread between long- and short-dated Treasury bonds, the yield curve turns negative when near-term bonds yield more than their long-term counterparts. This is an economically worrisome sign because, typically, bonds with longer maturities – or those that require investors to wait longer before redeeming them – pay more in periodic coupon payments than those with shorter maturities. 

Yield curve inversion indicates that investors prefer long-term bonds as they predict the economy falling and shirking in the near future. Therefore, this economic signal is considered by many to be a ‘red flag’ for an impending recession. Indeed, data analysis of the yield curve has proven to be the most consistent recession indicator for the U.S. economy – it has preceded every recession since 1960.

 

Yet, it might not be the case anymore. The inversion first occurred back in March 2019, then briefly reversed, only to head back into inversion territory for much of the summer. Despite this metric, the American economy has avoided recession, as it grew an unimpressive 2% last year,  and is now the longest economic expansion in U.S. history (11 years)

 

So what are the markets trying to tell us? While several economists believe that this is not more than a technical issue caused by the expectation for the considerable scale of financial support planned to be made by the Federal Reserve in the next years, the majority of analysts do assign it with significance.

 

Even if a recession is not ‘around the corner,’ the yield curve inversion should make investors and firms more aware of possible recession catalysts, in order to avoid their discount. In particular, geopolitical events, such as the spread of the Coronavirus in China or the tension around the Middle East and its effect on oil prices and quantity; hyper valuations of leading tech firms; and even the potentially hazardous impact of years of low-interest interest rates around the globe, must be taken into consideration.

 

Others believe that the markets are delivering a different statement: it is time to invest. The investment that took place in the midst of the last recession expectations – during 2018 – generated, on average, a 31% return during the next four quarters. Becoming more aggressive during market slums is indeed riskier, but can create significant value for financial investments. 

 

The next year will be crucial for the global economy, as all eyes are pointed towards the U.S and its investors. It will only be increasingly important to have the knowledge, tools, and professional assistance to invest smartly. 

 

For more on the Wall Street Journal, click here

For more on Forbes, click here.

For more on Bloomberg, click here.

#yieldcurve #macroeconomy #investment  #globalinvestmentment #fiscalpolicy #federalreserve #recession #americaneconomy #thestateoftheunion #SOTU #advisory #worldbank 


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