Inverted Yield Curve Triggers Recession Warnings

yield curve recession warning

From Birch Gold Group

On the morning of August 14, the yield curve between 2-year and 10-year treasuries inverted.

The Fed swept this type of curve “under the rug” last year in favor of a version that examines shorter-term treasuries. Oddly enough, even the shorter-term version that the Fed still favors has been inverted for a longer period of time. In fact, it remains inverted today.

The main yield inversion between 2-year and 10-year treasuries can be seen in a chart from CNBC below:

yield curve inverts

This inversion triggered a one-day 800 point drop in the Dow. As noteworthy as this drop is, perhaps even more important is the historical significance of this specific inversion.

Previous inversions of the 2-year / 10-year treasury rates have preceded every major recession for the last 50 years (see official chart below):

2 year 10 year treasury

Of course, the recession this particular inversion precedes may not happen immediately. But taking history into account (see shaded areas in the chart above), it looks like time may be running out.

In fact, the threat of a recession is so real that according to Arthur Bass, saying “this time is different” doesn’t have the impact it may have had two years ago:

I have to yield to the historical evidence and note that the phrase ‘this time is different’ usually doesn’t work.

Plus, as ZeroHedge noted back in March of this year, the chances for another recession in the near-future are at their highest since the Great Recession of 2008.

Currently, the main yield curve is still extremely flat, officially sitting at only one basis point at end-of-trading on August 14. It’s possible that it could invert again at any time, and economists are having a hard time ignoring the warning.

Global Trade War Tensions Complicate Matters Further

On top of an inverted yield curve, global trade tensions between the U.S., China, and other countries have not subsided.

According to an article in the New York Times, Chinese factories and the German economy are both facing effects from the U.S.-China trade war:

In ominous signs of the damage being done by the trade war between China and the United States, data released on Wednesday indicated that the German economy was hurtling toward recession and that growth at Chinese factories was slowing at a pace not seen in nearly two decades.

The rapidly increasing signals for a potential recession were linked with the escalating trade war in a piece from Forbes:

Negative signals have been accumulating rapidly. Consider first that over the past few days we have learned that GDP growth in both the U.K. and Germany turned negative. This is not encouraging. And of course this occurred against the backdrop of an apparently escalating trade war.

The yield curve inversion is alarming, but that alarm is further exacerbated by the fact the trade war between the U.S. and China seems to be far from over. Taken together, the recession signal seems to have turned into a giant neon warning sign.

Prevent Exposure to Uncertain Market Conditions

These economic indicators will continue to develop, and it’s safe to assume they will result in plenty of uncertainty in the markets.

The average length of time between an inversion like this and the last 5 recessions is 22 months, according to data at Credit Suisse going back to 1978. This could mean the market is on borrowed time.

But you don’t have to let a volatile market hit your retirement the way it did so many people in our last recession. You can start taking action now to protect your savings.

Having a diversified portfolio with assets known for their protection during uncertain times is a strategic way to protect your retirement. Holding physical assets such as gold and silver can help to protect your retirement savings as the markets move from “party” to “hangover”.

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