Should I worry about the inverted bond yield curve?
By: Carlos Nazario CPA, JD, Tax Director at Millan and Co, PC, Austin, TX. May, 2019. carlos@millancpa.com
The bond market is sending powerful signals that there’s economic trouble ahead for the United States economy.
Does it mean a recession is imminent? Certainly not.
Here’s what to make of it:
Yields Are Falling Everywhere
When investors get nervous, they buy government bonds. Why? Governments (usually) pay back their debts, so those bonds are a safe bet.
Those purchases push prices higher. And when bond prices rise, the yields — or the fixed interest rates investors collect on their bond investments — fall.
So, falling yields are to the economy what barometric pressure is to the weather: When they drop it’s often a sign that some kind of storm is coming.
The Inverted Yield Curve
This tumble in long-term bond yields is especially unnerving because it has pushed long-term yields even lower than short-term yields.
In an economically rational world, investors would demand higher interest rates on long-term bonds than they do for short-term ones. The reason: Locking up their money for a longer period is usually riskier and investors get paid more for that risk.
Today, in the United States, a government bond that’s due in three months will pay a higher rate than a government bond that is due in 10 years.
These occurrences, called inversions, are rare, and they have grabbed Wall Street’s attention for one simple reason: They have preceded every recession over the last 60 years (although some of those downturns took up to two years to materialize).
Around the world, and in the United States, investors in the bond market are behaving as if something strange is afoot.
Given their track record on calling turning points in the economy, it would be unwise to ignore them.
I am worried, are you too?
This article was based on Matt Phillips and Stephen Grocer, May 30, 2019 article titled The Bond Market Is Trying to Tell Us Something (Worry) published on the New York Times, for more information please visit:
https://www.nytimes.com/2019/05/30/business/bond-yield-curve-recession.html