The 'inverted yield curve' set off recession fears - what is it?

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However, it was the warning signals from the bond markets that led to the steep selloff.

The yield curve has inverted before each recession in the past half-decade. Something that will push future interest rates down low enough to justify long-term yields being low despite the risks. But it remains above shorter-term yields, which means not all of the yield curve is inverted and offers a bit of solace.

In afternoon trading, US benchmark 10-year Treasury note yields US10YT=RR were last down at 1.597%, from 1.68% late on Tuesday. Some market watchers also say the yield curve may be a less reliable indicator this time because technical factors may be distorting longer-term yields, such as negative bond yields overseas and the Federal Reserve's holdings of $3.8 trillion in Treasurys and other investments on its balance sheet.

How much investors pay for the bond determines the yield they will get - the higher the price, the lower the yield. To Bianco's point, this is less a sign about expected Fed behavior than about expected economic performance - investors expect the Fed to need to cut rates and then need to keep them low for a long time, which is why this is being treated as a recession indicator.

Investors are caught between slowing global growth and its impact on equity markets, with few alternatives to invest in when the dividends of many stocks are higher than the interest on government debt, said Rick Meckler, a partner at Cherry Lane Investments in New Vernon, New Jersey.

In the meantime, the inverted yield curve could mean a recession - but in two to three years, The Earnings Scout's Raich said.

Harvey's 1986 dissertation showed that the yield curve inverted before four recessions. Chinese markets were also hit, with the benchmark Shanghai Composite and the blue-chip CSI300 down 1.1 per cent and 1.0 per cent, respectively, while Hong Kong's Hang Seng lost 0.8 per cent. Senior US officials said on Wednesday China has made no trade concessions after Trump postponed the 10 per cent tariffs on over $150 billion worth of Chinese imports, the latest sign that efforts to reach a trade deal were going nowhere. The US 10Y-2Y #yieldcurve has turned negative for the first time since June 2007.

So what exactly is an inverted yield curve, and how anxious should you be?

Another thing to bear in mind this time around, particularly in the smaller United Kingdom market, is the hugely distorting impact of quantitative easing over the past decade and the sheer volume of bonds snapped up by the Bank of England and other central banks.

Expectations the U.S. Federal Reserve and other central banks would respond robustly to the recession warning helped world stocks to steady earlier.

The U.S. isn't the only major country suffering from falling yields. The Fed cut interest rates by 0.25% in July, its first rate cut in 11 years. For instance, three-month Treasurys have been yielding more than 10-year Treasurys since late May. The spread is widely used as a gauge to study the yield curve.

If it's all about the economy, the Trump administration would say the president is winning, big time.

The time between the inversion and the onset of a recession is, however, not uniform.

The yield curve inversion does not tell us anything about what might be the specific reasons for any impending recession.

An inversion in the yield curve is "a sign of a very significant fear of deflation", according to Stephen Moore, chief economist of the Heritage Foundation.



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