Why the inverted US yield curve could spell trouble for emerging markets: An inverted US yield curve could be the harbinger of hard times for emerging markets, Shuli Ren writes for Bloomberg. The yield spread between US three-month and 10-year Treasuries turned negative for the first time in over a decade on Friday, something that has presaged each of the past seven recessions in the US.

“But what is an inverted yield curve?” we hear you ask: The yield curve measures the differences in interest rates paid on bonds of all maturities. A conventional curve will feature low rates attached to short-term bonds, with the yield increasing as the maturity increases. This is because short-term bonds are generally seen as being lower risk (there’s less time in which something can go wrong), while long-term bonds are more likely to be affected by interest rate changes, defaults and economic slowdowns. The inverted curve flips this on its head, with short-term bonds carrying higher yields than long-term bonds. In this case, the yield on three-month US Treasurys rose to 2.46% on Monday, higher than the 2.42% rate on 10-years.

And how does this affect emerging markets? One school of thought tells us that this might be a positive development for EM. Increasing chances of a US recession makes it more likely that the Federal Reserve will lower rates. And the last time US curves inverted in 2006, EM high-yield bonds were unaffected — at least initially. But the threat of a US recession — one that is indirectly driven by China’s underlying economic problems and increasingly wild stimulus measures — is real. “The last time this happened, EM debt happily churned along for a few months, until one day the music stopped,” Ren says. “That party ended in tears.”