All three major US stock market indices declined on Friday as investors responded to one of the main recession indicators: the so-called reversal of the yield curve between 10 years and three months of treasuries.
Dow Jones Industrial Average
S & P 500
were around 1.5% at noon, while the
lagged nearly 2%.
The yield curve is the difference between the yields of longer-term and short-term government bonds. An inversion of the yield curve occurs when long-term yields fall below short-term rates. It has historically been seen as a reliable indicator of impending recessions.
Why? While the short-term side of the yield curve is driven mainly by the US Federal Reserve's policy, which reflects current economic strength, the long-term end of the yield curve – 10-year government bonds and further out – points to the long-term bond investor. long-term market views.
If bond investors are optimistic about the economy and believe that interest rates will rise, they are more willing to hold short-term bonds and hope to get higher returns later. On the other hand, if bond buyers think that the economy is trending down and interest rates are likely to decline, they prefer to hold longer-term bonds to secure the current higher yields.
In this case, higher demand for longer-dated bonds will increase prices and lower yields. Long-term bond yields are typically higher during economic expansion as bond investors need more compensation to get locked up. However, when sentiment becomes too pessimistic, long-term yields may fall below short-term rates.
That's it happened Friday.
Experts are divided, with the yield curve being the most reliable, but the Fed prefers to look at the curve between 10-year and 3-month government bonds, which turned negative on Friday at minus 0.196 percentage points.
A reversal of the yield curve had preceded the recent recessions, this is not the case immediately, and the lead time was very mixed. Historically, a recession can occur one to two years after the curve is reversed, and the stock market usually gains value from the day of the reversal to its cycle peak.
So we have more time to watch.
Write to Evie Liu at email@example.com