Economic Forecasts

Is a Recession on the Way?

The recent dip in long-term bond yields below short-term yields isn't cause for panic.

Market watchers broke into a collective sweat recently when the yield on 10-year Treasuries sank below the 3-month T-bill yield. When yields on short-term debt exceed those on longer-term bonds, the yield curve—a representation of interest rates on bonds of varying maturities—is said to be inverted. A little perspiration is understandable: An inverted yield curve has preceded each of the past seven recessions, dating back to the mid 1960s.

Janet Bodnar

K6-AHEAD.indd

Getty Images

An inversion is considered a recession indicator because although short-term rates are driven by current Federal Reserve policy, longer-term rates reflect bond investors’ expectations for inflation and future economic growth. When investors believe that the economy will weaken, they tend to pile into the safe haven of longer-term Treasuries, locking in higher rates while they can. In doing so, they bid up the price of long-maturity bonds, driving down yields (bond prices and yields move in opposite directions). A yield curve inversion is an extreme, and rare, no-confidence vote.

As with any economic bellwether, the yield curve isn’t foolproof. Although all recessions since the ’60s have followed inversions, not all inversions have led to recessions. And there is little predictability as to when a recession will hit or how long it will last. Since 1968, the time between the inversion and eventual recession has ranged from five to 16 months.

Moreover, March’s in­version wasn’t severe (a difference of only a few hundredths of a percentage point) or long-lasting (it has since flipped back). Should the long end dip more than 0.5 percentage point below the short end, it would be cause for greater concern, says LPL senior market strategist Ryan Detrick.

Whether the recent inversion is a blip or a harbinger of recession remains to be seen. Regardless, investors should consider it a sign that things are closer to the end than the beginning of the economic cycle, says Sam Stovall, chief investment strategist at research firm CFRA. “By July, it will have been the longest economic expansion in history. Things don’t last forever, right?” he says.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
9 Great Growth ETFs for 2022 and Beyond
ETFs

9 Great Growth ETFs for 2022 and Beyond

These growth ETFs offer exposure to higher-risk, higher-reward stocks while lessening the risk of a single stock torpedoing your returns.
January 18, 2022
The 10 Best Closed-End Funds (CEFs) for 2022
CEFs

The 10 Best Closed-End Funds (CEFs) for 2022

These high-yielding CEFs won't just significantly boost your portfolio income. They'll also allow you to buy their underlying stocks and bonds at a di…
January 12, 2022

Recommended

Semiconductor Stocks: A Smart Bet for the Long Haul
Becoming an Investor

Semiconductor Stocks: A Smart Bet for the Long Haul

Stocks in this growing industry will stay in demand long after supply-chain snarls are unraveled.
January 26, 2022
A Dynamic Duo for Yield in 2022
Investing for Income

A Dynamic Duo for Yield in 2022

Investors should maintain core positions in both REITs and utilities, with regular contributions to both.
January 26, 2022
Kiplinger's Economic Outlooks
Economic Forecasts

Kiplinger's Economic Outlooks

Regularly updated insights on the economy’s next moves.
January 21, 2022
The Kiplinger Letter’s Top 10 Forecasts for 2022
Economic Forecasts

The Kiplinger Letter’s Top 10 Forecasts for 2022

What to expect from the U.S. economy and an election-year Congress, as well as the outlook for cryptocurrency regulations, TikTok and more. Plus, we g…
January 13, 2022