At the beginning of August, the U.S. yield curve became inverted. And, except for a week in September, the yield curve has been inverted ever since.
Simply, the yield curve is the ratio between what a U.S. 10-year Treasury Note pays and what a U.S. two-year Treasury Note pays. Since August, investors have been able to get a higher return from a two-year note than from a 10-year note.
Historically, periods of prolonged inverted yield curves have been followed by recessions. By definition, during a period of inverted yield curve, the market is saying it sees better business now and slower business down the road.
While I read a few articles on the inverted yield curve phenomena when it first happened in August, I’ve read or heard very little about it since and this is concerning to me. In an era where market information has become so readily available, I believe reporters and analysts have become more concerned with the last quarterly earnings… placing little emphasis on things that “aren’t happening.”
An inverted yield curve just sits there. When it first happens, investors take note. But, as the economy continues to chug along, investors forget about the inverted yield curve and come up with that favorite line, “it’s different this time.”
In my humble opinion, an inverted yield curve is dangerous to our economy because it signals a slowdown ahead. Depending on what report you believe, periods of inverted yield curves are followed by recessions 80% to 90% of the time. Given what I see in the economic environment that exits today, I see no reason why the future will be any different this time. Investors should take note of the inverted yield curve and its ramifications.
NEWSFLASH–Wal-Mart same store sales rose only half a percent in October, their smallest annual gain in about five years. Wal-Mart is the world’s biggest retailer and often viewed as an indicator of American buying patterns.