The stock market was way down today mainly because of fears generated by the inverted yield curve. Basically, this means that short term interest rates on US treasury securities are higher than long term rates. It's an aberration of the treasury market that happens from time to time. Over the last 50 years, it has happened nine times. That depends somewhat on the definition that gets used; a two day inversion is not the same as a five month inversion. In any event, seven out of the nine yield curve inversions were followed by a recession in 12-18 months. As a result, it is an article of faith among some market strategists and economists that an inverted yield curve means a coming recession. The panic in the market today was basically fear of an impending recession.
The reality, however, is that there is no way to know that a recession is coming. Long term interest rates are being kept down because many safe investments around the world are now paying negative returns. German government bonds, for instance, return a negative half percent on a ten year bond. You buy the bond for 100, but after getting no interest for ten years, you get back 99.5. It is no wonder that European investors, in particular, are moving to treasuries. Getting a return of 1.6% per year is a lot better than buying a German bond which guarantees that you will lose money over the ten years.
Negative rates on government bonds are not something that has been around over the last 50 years. All those other yield curve inversions came when there were no negative rates elsewhere pushing the long term treasury rates down. As a result, the yield curve inversion may not be a sign of recession or even of bad news for the US economy.
The financial media and the mainstream media will make a big deal out of today's decline. It is a big deal; we don't have declines like this very often. Still, we cannot state that we are facing a recession based only upon the inverted yield curve. Indeed, the signs do not point to a recession at the moment. The biggest problem is that media driven hysteria is more of a danger to the economy than almost anything else right now.
The reality, however, is that there is no way to know that a recession is coming. Long term interest rates are being kept down because many safe investments around the world are now paying negative returns. German government bonds, for instance, return a negative half percent on a ten year bond. You buy the bond for 100, but after getting no interest for ten years, you get back 99.5. It is no wonder that European investors, in particular, are moving to treasuries. Getting a return of 1.6% per year is a lot better than buying a German bond which guarantees that you will lose money over the ten years.
Negative rates on government bonds are not something that has been around over the last 50 years. All those other yield curve inversions came when there were no negative rates elsewhere pushing the long term treasury rates down. As a result, the yield curve inversion may not be a sign of recession or even of bad news for the US economy.
The financial media and the mainstream media will make a big deal out of today's decline. It is a big deal; we don't have declines like this very often. Still, we cannot state that we are facing a recession based only upon the inverted yield curve. Indeed, the signs do not point to a recession at the moment. The biggest problem is that media driven hysteria is more of a danger to the economy than almost anything else right now.
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