The financial world continues to be on edge as another key recession indicator has flipped, sparking fresh concerns about the economy’s health. After more than two years of being inverted, the yield curve has returned to its normal state – a shift that’s historically signaled approaching economic trouble.
Here’s what’s happening: The yield on 10-year US Treasury bonds recently climbed above that of 2-year bonds. As of Friday, the 10-year yield stood at about 3.70%, while the 2-year yield was 3.66%. This might seem like a small difference, but it’s significant.
Why does this matter? In the past, when long-term bond yields rise above short-term yields after a long period of inversion, it’s often preceded a recession.
José Torres from Interactive Brokers explains, “A positive spread across the 2- and 10-year Treasury maturities following a long period of a negative difference has historically preceded economic downturns.”
The 2-year Treasury yield is almost back below the 10-year yield, close to reversing the inversion of the yield curve that began in 2022
A few charts show what has happened the last few times that the yield curve "un-inverts" pic.twitter.com/pzDfiEvpT1
— Nick Timiraos (@NickTimiraos) September 4, 2024
In fact, every recession since 1976 has followed this pattern. It’s like a warning light on your car’s dashboard – it doesn’t guarantee trouble, but it’s worth paying attention to.
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The stock market certainly seems worried. On Friday, we saw a sharp sell-off, with tech stocks hit particularly hard. The Nasdaq 100 index dropped about 2.6%. Investors appear to be selling first and asking questions later.
Adding to the unease, the August jobs report came in weaker than expected. The economy added 142,000 jobs, falling short of the 164,000 economists had predicted. This lackluster growth suggests the economy might be losing momentum.
However, not everyone is convinced we’re headed for a downturn. James Reilly from Capital Economics thinks this time could be different. He notes that other market risk indicators aren’t flashing red like they were a month ago.
“On balance, investors seem to think that disinversion will not be followed by a recession,” Reilly said. “That is to say, they think this time will be different.”
It’s important to remember that economic indicators, while useful, aren’t foolproof predictors. They’re more like pieces of a puzzle that need to be considered together.
This latest development comes after other recent recession warnings. Just last month, another indicator called the Sahm Rule was triggered, leading to similar debates about an impending downturn.
For investors and everyday Americans, these mixed signals can be confusing. The smart approach is to stay informed without panicking. Keep an eye on a range of economic indicators, not just one or two. And remember, even financial experts often disagree on what the future holds.
However these indicators should not be ignored. It might be wise for individuals and businesses to review their financial plans and ensure they’re prepared for potential economic challenges. While we can’t predict the future with certainty, we can take steps to be ready for whatever comes our way.
