US inverted yield curve: Economic recession indicator suggests difficult times ahead
The inverted yield curve is feared by many investors in the world as many claim that is a signal that a recession in the economy will soon take place. On the other hand, many argue that is “false advertisement” as it is only indicating the movements of long-term bond yields against short-term bond yields. However, that as its own is a big indicator of something is happening in the economy. The inverted yield curve and the term spread, the different between long-term interest rates and short-term interest rates have been indicators of slowdowns in the US economy over 60 years now, and in all of the cases except one, they signaled that recession was coming.
- The yield curve is an indicator of bond investors’ behavior. Meaning that demand for short-term bonds will have a different impact on the yield curve than demand for long-term bonds.
- The most important factors are herding and loss aversion effect, which both are a physiological phenomenon which takes place in the human mind and affects in a great extent the decision-making process of an investor.
- Individual investors are initiators of the inverted yield curve. Meaning that their behavior and their actions dictate which movement the yield curve will take.
Reasons to buy
- Examines if the inverted yield curve can signal a recession
- Does the inverted yield curve signals a recession? - What is the negative term spread? - Is the US economy currently under threat?
- 1. OVERVIEW
- 1.1. Catalyst
- 1.2. Summary
- 2. THE US YIELD CURVE AS AN EFFECTIVE RECESSION INDICATOR
- 2.1. The yield curve displays the difference between older and younger bonds
- 2.2. The yield curve is an expression of bond investors’ behavior
- 3. REAL LIFE IMPLICATIONS OF AN INVERTED YIELD CURVE
- 3.1. Pessimistic behavior alongside with herding and fear of missing out effect invert the yield curve
- 3.2. An inverted yield curve has a big impact on fixed-income investors, consumers and financial institutions
- 4. HISTORICAL ANALYSIS INDICATES THAT AN INVERTED YIELD CURVES SIGNALS RECESSION
- 4.1. Negative term spread is the real indicator of a recession
- 4.2. The US economy is currently under threat
- 5. APPENDIX
- 5.1. Abbreviations and acronyms
- 5.2. Sources
- 5.3. Further reading
- 6. ASK THE ANALYST
- 7. ABOUT MARKETLINE
- List of Figures
- Figure 1: Yield curve with an upward trend
- Figure 2: Yield curve with an downward trend or inverted yield curve
- Figure 3: Herding effect in the stock market
- Figure 4: The term spread and recessions