The bond market has begun signaling that it
expects the U.S. economy to slip into an economic
downturn.
The signal is coming from U.S. Treasury yields
— the amount that investors earn on
their investment. Bonds with longer
maturities typically yield more
than short-term bonds, as
investors expect to get paid more
for lending the government
money for a longer
period.
But twice this year
the yields on two
widely traded bonds
inverted — investors are
now willing to pay more
for short-term safety than for longer-term bonds.
The signal doesn’t have a perfect track record
as a recession predictor, but it has preceded each
of the last seven by a year or two.
The yield curve inverted in
February 2006, at the height
of the housing bubble and a
year before the financial
crisis began. It also
inverted in July 2000, as
the dotcom bubble was
starting to burst. The U.S.
economy would slip into a
short recession in March
2001. The yield curve also
inverted shortly before the
recession of 1990-1991