NEW YORK–Does the bond market “smell a recession” in the near future?
Some analysts believe it does and further believe Wall Street has also gotten a “whiff” of a downturn, as well.
On Friday, long-term yields fell below yields on short-term bonds — the so-called “yield curve inversion–an occurrence that has preceded every recession over the last 60 years, noted the New York Times as well as other market and economic experts.
It should be noted there are also other ways to measure the yield curve, with many Wall Street analysts looking at the difference between yields on two-year and 10-year Treasury notes, which has not yet inverted.
“Investors normally demand higher yields to buy longer-term bonds, and when those long-term yields decline it can signal a slowdown in economic growth,” summed up the Times.
Yields Decline
The Friday inversion followed a sharp decline on yields on long-term Treasury bonds this week after the FOMC last week opted to not only leave rates unchanged, but indicate no rate increases are likely in 2019 and perhaps only one through 2021.
The Times noted a “round of dour economic data from Europe” helped push rates into inverted territory. The yield on the 10-year Treasury declined to 2.44% on Friday, its lowest level since January 2018, and just below the 2.45% yield on three-month Treasury bills.
Research from the Federal Reserve Bank of San Francisco has cited the yield difference between three-month Treasury bills and 10-year Treasury notes — which inverted Friday — as the most reliable predictor of recession risk.
Also on Friday, the S&P 500 fell 1.9%, as stock market investors grew concerned about the outlook for economic growth, according to analysts. It was the second-worst drop for the market this year. The Nasdaq composite index fell 2.5%.
Campbell Harvey, a Duke University finance professor whose research first showed the predictive power of the yield curve in the mid-1980s, stressed in comments to the New York Times that an inversion must last, on average, three months before it can credibly be said to be sending a clear signal. If that does occur, history shows that the economy will fall into a recession over the next nine to 18 months.
Money Anxiety Increases
Meanwhile, Dr. Dan Geller, developer of the Money Anxiety Index and president of Analyticom, reported the Money Anxiety Index started warning of an economic slowdown in December of 2018, when the Index increased to 45.4 - an increase of 2.2 points.
“After nearly eight years of declining financial anxiety (i.e. increasing financial confidence), the Money Anxiety Index, which measures the level of financial anxiety based on what people actually do with their money, started climbing up,” said Geller. “The Money Anxiety Index reached its lowest turning point of 43.2 in November of 2018 after dropping from a high of 100.5 in the aftermath of the Great Recession.”
According to Geller, the Money Anxiety Index Is highly predictive, having predicted the arrival of the Great Recession 14 months prior to the official declaration of the recession in December of 2007.