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Short-term US Government borrowing costs have fallen below long-term costs in a reversal of the so-called “inverted yield curve”, a move that some analysts believe could herald an imminent economic downturn. The yield on the rate-sensitive two-year Treasury fell below that of its 10-year counterpart on Thursday, after data showed the US private sector added the fewest jobs in three and a half years in August. Bond yields move inversely to prices.
An inverted yield curve – when long-term yields are lower than short-term ones – has historically been seen by some investors as an indicator of a recession, even though it has not always proved accurate. The bond market has been sending this signal almost continuously for the past two years. However, investors and strategists are split on what the ending of this inversion – driven by investors increasing their bets on rapid interest rate cuts in recent weeks – might mean.
While some speculate it could mean better news about the economy, others say it may mean the precise opposite – that a downturn is now imminent. “It’s tempting to suggest we can sound the all-clear” on the economy but “we’re not out of the woods yet”, said Deutsche Bank strategist Jim Reid. He said that recessions tend to start when the yield curve moves away from being inverted.
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