The US may not be as close to a recession as the yield curve suggests
The US is actually not as close to a recession as it seems, regardless of the chatter about the inverted yield curve: You know how everybody and their mother has been fretting over an impending recession in the US? It’s actually “a less than 50-50 proposition,” Peter Coy writes for Bloomberg. The number of economists predicting a downturn has actually declined since the beginning of the year: 40% of economists surveyed last week forecast a recession by the end of 2020, compared to 52% back in February. And according to Bloomberg’s poll of economists, the median forecast sees the US economy growing at a 1.8% clip next year.
The inverted yield curve just isn’t what it used to be back in the day: Unlike times past, these days it doesn’t take much to invert the yield curve. Long-term bonds were not always the safe haven asset they are today, and had to offer higher yields in order to attract investors. This is the traditional upward sloping yield curve, featuring a sizeable difference between the rates offered on 2-year and 10-year bonds. Now, the US 10-year treasury is seen as one of the safest fixed-income assets, which has resulted in increased demand and a drop in yields. The upward slope of the yield curve has gradually disappeared as 10-year bond yields have fallen closer to rates on short-term bonds (in econo-speak, this is what is referred to as a “flattening” of the yield curve). Whereas before an inverted curve necessitated a substantial drop in long-term yields, these days it may only take a slight decline. What this means is that the inverted yield curve can no longer be assumed the harbinger of recession that it once was.