Yield curve fear is back

One of the most reliable recession indicators in markets is starting to flash red. Investors should beware

Federal Reserve chairman Jerome Powell
Federal Reserve chairman Jerome Powell
(Image credit: © Valerie Plesch/Bloomberg via Getty Images)

Between war and inflation, markets have a lot to worry about. So fretting over an arcane-sounding bond market phenomenon may not be top of your priority list. But if history is any judge, it should be. We’re talking about the “inverted yield curve”. We explain exactly what a yield curve is here, but, put simply, when a yield curve inverts, it means that the interest rate on long-term government bonds is lower than that on short-term ones. That’s a sign that the market thinks interest rates will have to fall in the future, which implies slower growth, or even a recession.

The good news is that the most significant bit of the yield curve, the gap between the two-year US Treasury bond and the ten-year, is yet to invert. As of Monday, the ten-year yields around 2.3% while the two-year yields 2.1%. The bad news is that bond investors are betting that within three months, the two-year yield will be above the ten. And in the last 40 years, every time that’s happened, a recession has followed within 24 months.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.