BZ Chart Of The Day: Why This Chart Spells 'Recession'

The yield curve is the most inverted that it has been since 2000. This could be a sign of recession. It has been an accurate indicator in the past.

The amount of a dividend that a bond pays is fixed. So as the price of the bond fluctuates, so will the percentage yield.

Related Link: US Treasury Yield Remains Inverted After Solid Jobs Number: Will The Economy Tip Into A Recession?

For example, if a bond is issued at $100 and pays a $9 annual dividend, it would be a 9% yield. Now suppose the price of the bond falls to $90. The yield would be 10%. And if the bond went to $110, the yield would be 8.1%.

Typically, the longer the maturity of the bond, the higher the yield. But this isn’t the case with a yield curve inversion. Now the two-year rate is higher than the 10-year yield.

This occurs because bond traders aggressively sell short-term bonds and buy long-term ones. They think the short-run economic prospects aren’t good, but the longer-term picture looks OK.

Their aggressive selling of short-term bonds pushes their yields higher. The aggressive buying of long-term bonds pulls their rates lower. When these two rates cross, they are said to be inverted. 

Historically, these conditions have been a good predictor of an upcoming recession. It may happen again.

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Posted In: BondsTechnicalsEconomicsMarket-Moving ExclusivesMarketsTrading IdeasRecessionyield curve