Yield Curve Inversion: A Warning Sign You Can't Ignore

1 Sep

The yield curve, which shows the difference between short-term and long-term interest rates on government bonds (US10Y-US02Y). In normal market conditions, this number should be positive because the interest that investors require on 10Y bonds is higher than the interest required on 2Y bonds. Interest is a value of risk perception. Higher risk of default means higher required interest on bonds.

As seen on the chart, the moment that the yield-curve "un-inverts" (yellow circles) is a critical market indicator that can often predict upcoming recessions.

In the last 35 years, the un-inversion has always preceded a dump in stock prices and a recession.

Seeing this chart, it's not too far-fetched to assume that the world will go into a recession at some point in the next 1-2 years.