This line shows the difference between long term and short term yields.
In late 2006, it started heading down and when it went below the yellow line in 2008,
it became inverted and this happened.
Dow tumbled more than 500 points after two pillars of the street tumbled over the week.
Lehman Brothers has filed for bankruptcy.
Stocks all around the world are tanking because of the crisis on Wall Street.
We are in the midst of a serious financial crisis.
Now, in 2018, we're heading down towards the yellow line, again.
The inverted yield curve has predicted
all three recessions since its correlation was discovered in 1991,
in 2000 and 2001,
and the global financial crisis in 2008.
The professor who discovered it says that there have been no false predictions yet.
Does this mean that we're going to have another recession?
When people talk about yield curves,
they're talking about how much they get paid to hold bonds for various lengths of time.
Bonds are essentially loans,
say to the US government,
that mature or come due at some point in the future.
A yield curve plots the rate you get paid for each of the holding periods.
My name is Keith Morris.
I have been in the financial services business for almost 40 years now.
Typically, you would have what's called a positive yield curve.
You theoretically want to get more interest
return out in 30 years than you do in one year,
six months, five years, 10 years.
The longer the bond insurer has to pay you back,
the more time there is for things to go wrong and the more you should be paid.
The yield curve that economists like to talk about is
the comparison of returns on US Treasuries of different maturities,
three months, two years,
five years, 10 years and 30 years.
A normal yield curve shows more yield the further out you go,
just like you'd expect,
but an inverted yield curve shows the opposite.
An inverted yield curve is really interesting in that it doesn't happen very often.
Probably, happened half a dozen times or call it six times over the last 15 or 20 years.
Each time we have had a recession,
I want to say, each time except for one,
we have actually had a recession afterwards.
An inverted yield curve is when bonds that mature in the short term
start to yield more than the ones that are due 10 or 30 years out.
This happens because people are worried about the government's ability to pay back
loans in the near future demand higher payout rates to hold that debt.
The inverted yield curve, by itself,
does not necessarily mean you're going to have a recession,
but it is an indicator that there are people very worried about
the future and think the future is going to be weaker than the current time.
Right now, the yield curve is flattening with the difference between
long and short term yields returning to the very low levels that it hit in 2006,
which came before the financial crisis a decade ago.
A full inversion may be on its way,
that doesn't necessarily signal that recession is imminent.
Historically, a yield curve inversion comes
18 months to two years before the economy goes south.
Although, the relationship is sound,
people don't always use the yield curve the right way.
Campbell Harvey, a Professor of Finance at Duke University,
who discovered the correlation in 1986 says that,
"Right now, the media is wrong because they're not using his model correctly."
The media has been using the difference between
10 and two year bond yields as a reference point,
but Harvey says the right relationship to look at is the difference
between five year and three month yields.
That is currently positive and Harvey says,
it would have to go negative for a full quarter before it indicates a recession.
Having been in the bond market for almost 40 years,
you can't predict anything with one indicator, right?
I mean, it just doesn't make any sense.
You have to look at employment.
You have to look at wage gains.
The yield curve is one of them.
You have to look at the global economy these days.
Inverted yield curves are just one piece of the puzzle,
that is, economic predictions.
It's not the new fear gauge,
it's just another tool in economists pockets.
Of course, the question isn't if another recession is going to hit,
it's when, but inverted yield curves alone aren't going to show you the big picture.
So, take it with a grain of salt.
It's just another way that economists look at the market.
As President Ronald Reagan once said,
"If trivial pursuit was designed by economists,
it would have 100 questions and 3,000 answers.
Do you think that we're in for another recession?
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