Barron's: Bond Market Indicator May Predict Next Recession

Newsmax | 7/17/2017 | Staff
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Experts are keeping a close eye on a Treasury bond market indicator, which has correctly predicted the last three recessions, for signs of disaster on the economic horizon during the Trump administration.

An “inverted Treasury bond yield curve” occurs when short-term interest rates yield more than longer-term rates. The yield curve reflects the extra interest investors require to buy bonds of a longer maturity. When they demand higher payments for shorter-dated bonds than for longer-dated ones it shows that they are more concerned about nearer-term risks, Reuters explained.

Yield - Curve - Interest - Rates - Short-term-rates

“Normally, the yield curve slopes upward, since long-term interest rates are usually higher than short-term-rates,” Barron’s explained. “Accordingly, since the chart (below) measures the slope of the yield curve by subtracting the interest rate on the three-month Treasury bill from the 10-year Treasury note, the line is usually in positive territory. But when the yield curve goes flat or inverted, short rates equal or exceed long ones, and the 10-year minus the three-month is zero or a negative figure,” Barron’s explained.

A January 2010 Federal Reserve Bank of New York report explained why an inverted yield curve signals recession. Financial institutions tend to borrow on the short end and lend on the long, Barron’s explained. And when borrowing short costs as much or more than gains from lending long, this “reduces net interest margin, which in turn makes lending less profitable, leading to a contraction in the supply of credit”—and sparking a contraction in output, Barron’s reported.

Chart - Measure - June - Months - Onset

“The chart’s yield-curve measure went negative in June 1989, 14 months before the official onset of the 1990-91 recession; nine months before the recession of 2001; and most recently, 16 months before the downturn of 2008-09. Since the yield curve is still positive, it seems the expansion still has breathing room,” Barron’s explained.

And while the yield curve has yet...
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