Inverted Yield Curve May Signal Recession But Stock Market Top Iffy# Stock
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For stock market investors, an inverted yield curve is a sign that equities
could peak before an economic recession hits. It also can be a precursor to
a bear market in stocks, where equities fall 20% or more from highs.
While an inverted yield curve has been a reliable indicator of slowing U.S.
economies, the timing of an upcoming recession has been uncertain.
Historically, prolonged "curve inversions" have usually preceded major
economic slowdowns by about a year.
What Is An Inverted Yield Curve?
Simply put, an inverted yield curve occurs when short-term bond rates
surpass those of long-term notes.
The most closely watched indicator for an inverted yield curve is when the
yield of three-month Treasury bills rises above the yield for 10-year
Treasuries. U.S. Treasuries are bonds, or debt, sold by the federal
government.
The flattening of the yield curve had been a trend since around 2013.
Inverted Yield Curve 2019
An inverted yield curve finally reared its head on March 22, after the
Federal Reserve Board signaled that no more interest rate hikes would be
forthcoming this year. Ten-year note yields sank below three-month Treasury
bill yields for the first time since August 2007.
The Fed's dovish stance prompted warnings that the U.S. could be headed for
a recession in late 2019 or early 2020.
However, economist Ed Yardeni has noted that an inverted yield curve can
occur prematurely. For example, it turned negative a couple of times during
1995 and during 1998. A recession did not officially start until March 2001.
However, U.S. stock markets imploded much sooner — in 2000 — amid over-
investment in unprofitable internet companies and telecom networks.
Monetary Policy's Effect
While the yield curve can signal that the risk of recession is rising,
global monetary policy remains equity-market friendly, analysts say. A solid
U.S. labor market continues to support consumption. And, some economic
indicators such as copper prices are still positive.
Banks are a key sector to watch because a yield curve is associated with a
credit crunch. It's said that banks stop lending when the rates they pay in
money markets on their deposits and their borrowings exceed the rates they
charge on the loans they make to businesses and households.
Bank of America (BAC), JPMorgan (JPM), Citigroup (C) and Goldman Sachs (GS)
sold off following the yield curve inversion in late March.
could peak before an economic recession hits. It also can be a precursor to
a bear market in stocks, where equities fall 20% or more from highs.
While an inverted yield curve has been a reliable indicator of slowing U.S.
economies, the timing of an upcoming recession has been uncertain.
Historically, prolonged "curve inversions" have usually preceded major
economic slowdowns by about a year.
What Is An Inverted Yield Curve?
Simply put, an inverted yield curve occurs when short-term bond rates
surpass those of long-term notes.
The most closely watched indicator for an inverted yield curve is when the
yield of three-month Treasury bills rises above the yield for 10-year
Treasuries. U.S. Treasuries are bonds, or debt, sold by the federal
government.
The flattening of the yield curve had been a trend since around 2013.
Inverted Yield Curve 2019
An inverted yield curve finally reared its head on March 22, after the
Federal Reserve Board signaled that no more interest rate hikes would be
forthcoming this year. Ten-year note yields sank below three-month Treasury
bill yields for the first time since August 2007.
The Fed's dovish stance prompted warnings that the U.S. could be headed for
a recession in late 2019 or early 2020.
However, economist Ed Yardeni has noted that an inverted yield curve can
occur prematurely. For example, it turned negative a couple of times during
1995 and during 1998. A recession did not officially start until March 2001.
However, U.S. stock markets imploded much sooner — in 2000 — amid over-
investment in unprofitable internet companies and telecom networks.
Monetary Policy's Effect
While the yield curve can signal that the risk of recession is rising,
global monetary policy remains equity-market friendly, analysts say. A solid
U.S. labor market continues to support consumption. And, some economic
indicators such as copper prices are still positive.
Banks are a key sector to watch because a yield curve is associated with a
credit crunch. It's said that banks stop lending when the rates they pay in
money markets on their deposits and their borrowings exceed the rates they
charge on the loans they make to businesses and households.
Bank of America (BAC), JPMorgan (JPM), Citigroup (C) and Goldman Sachs (GS)
sold off following the yield curve inversion in late March.