The Bond Market Gazes Into Future, Only Sees Pain
THE ECONOMY 12:45 P.M. NY Magazine
May 30, 2019
The Bond Market Gazes Into Future, Only Sees Pain
By Eric Levitz
A ... more alarming — development is that this frenzy in ten-year bond buying has actually pushed the yield on long-term U.S. Treasury bonds beneath the yield on short-term ones. This phenomenon is known as an “inverted yield curve,” and it is one of the most reliable indicators that the American economy is headed for a recession in the near future. The logic behind this correlation is simple. In ordinary times, investors will demand a higher yield on long-term bonds than short-term ones, since locking your money into a Treasury for a decade is riskier than doing so for just three months. After all, a bond that pays 2.5 percent interest may be appealing today, when inflation remains below 2 percent — but if prices start spiking five years from now, and the Federal Reserve drastically raises benchmark interest rates, then that bond will plummet in value.
...As my colleague Josh Barro notes, the trade war between the United States and China is on the cusp of escalating to the point where the direct effects of rising tariffs could shave up to one point off of U.S. GDP. That wouldn’t necessarily be enough to tip America into recession, but it would put a damper on growth. Regardless, the direct effects of Donald Trump’s trade war almost certainly scare investors less than its broader implications...
What’s more, it isn’t hard to find causes for bearishness outside of U.S.–Sino relations. John Bolton is perpetually nudging the United States toward a disastrous war with Iran, North Korea’s latest missile tests threaten to reignite tensions with Pyongyang, and, of course, mankind is continuing to march headlong toward ecological destruction.
http://nymag.com/intelligencer/2019/05/does-the-inverted-yield-curve-mean-a-recession-is-coming.html