The Looming Recession: The Real Danger After the Yield Curve De-Inverts

​You have been warned! The bond market is sending strong signals that a recession is on the horizon, but the real trouble may not be during the current yield curve inversion—it’ll likely come after the curve corrects itself. The difference between the yields on 2-year and 10-year Treasury notes has been inverted, a highly reliable indicator of bloody recessions. However, as this inversion begins to right itself, the risk of an economic downturn increases.


 
Understanding the Yield Curve De-Inversion 

When the yield curve is inverted, short-term interest rates are higher than long-term rates, reflecting investor pessimism about the near future. But history shows that the most severe economic downturns often occur after the yield curve de-inverts. This process, known as yield curve steepening, indicates that long-term rates are rising again, which can signal that the economy is transitioning from a phase of uncertainty into a recession.
 


Why De-Inversion Signals Trouble 

The de-inversion of the yield curve is often misunderstood. While some might view it as a return to normalcy, it typically heralds the beginning of the recession that the initial inversion predicted. As the curve steepens, it suggests that the market is anticipating economic weakness, forcing long-term rates higher as investors demand more compensation for the growing risks.


In other words, it’s like seeing storm clouds begin to break after a long period of overcast skies. While it might seem like the weather is improving, those clear skies actually signal the arrival of a severe storm, not the end of one. The break in the clouds is just the calm before the storm hits in full force.

 
Conclusion 

The bond market’s current inversion is a clear sign of looming economic challenges, but the real danger lies ahead when the curve begins to steepen and de-invert. This phase has historically been followed by severe economic downturns, suggesting that the most significant risks are yet to come. Investors and policymakers must remain vigilant as this indicator progresses, understanding that the de-inversion phase could mark the beginning of the next recession.

You have been warned. 

​Learn more at FreeOnlineTradingEducation.

​Des Woodruff of GrokCor

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