Something happened Monday that rang all kinds of economic alarm bells: the treasury yield curve inverted. What that means is that investors make more off the three-year treasury note than the five-year note. And that means is the market is preparing for a recession.
In a nutshell, the inversion of the treasury yield curve means more investors are moving money into bonds, because bonds are considered relatively safe. When more investors look to long-term bonds, the Federal Reserve is less inclined to offer enticing rates, which leads to the yield of long-term bonds dropping.
“Inversion of that curve is the real recession red flag,” said Neil Wilson, the chief market analyst at Markets.com.
And the preference for long-term bonds shows that investors are skeptical of the government’s ability to pay back its three-year bonds as compared to its ability to pay back its five-year bonds. That is what makes the yield curve invert.
That being said, the strongest predictor — the inversion of the three- and ten-year bonds — hasn’t yet inverted.
Yield curve inversions are predictors of recessions. They’ve proceeded every recession since World War II. It could mean a recession is a few years off — the inversion before the 2008 recession happened in 2005 — but according to these signs from the market, it most likely is coming.
“Mind you, there can be a long delay between the first inversion of the curve and subsequent rate cuts, as the last cycle showed,” Cameron Crise, a macro strategist at Bloomberg, said in a report. “Still, it’s more evidence that we’re in the ‘late 2005’ analogue of the current Fed campaign.”
There have been warning signs of a pending recession for a while. And those warning signs have been exacerbated by a trade war spearheaded by President Trump. To say nothing of the potential explosive recession coming in the next few years as millions more Americans will lose their jobs to automation.
It certainly doesn’t help that Trump called himself “tariff man.”
Economies are fueled largely by expectation and faith, the belief of what is and is not reliable. And flipping the yield curve shows a lack of faith, and an expectation of recession.
Katelyn Kivel is a contributing editor and senior legal reporter for Grit Post in Kalamazoo, Michigan. Follow her on Twitter @KatelynKivel.