Risk of Recession has risen

August 19, 2019

Last Week in Review: Yield Curve Inversion Discussion

This past week we watched Bond yields/interest rates decline around the globe on rising fears of a global recession.

It’s worth noting that home loan rates did not partake in the declining interest rate party this week as the Treasury market, not the Mortgage Backed Security market, received the majority of investment dollars.

A recession is defined as two consecutive quarters of negative growth, so when Germany reported its economy shrank or contracted, financial markets were spooked and investors fled into the safe haven of the U.S. dollar and U.S. denominated assets like Treasuries.

The flood of capital into the U.S. caused our 10-year Note yield to drop sharply and beneath that of the 2-year Note yield, causing a yield curve inversion for the first time since 2007… right before the global financial crisis.

History has shown that each time the 10-year yield moved beneath the 2-year yield in the last 50 years, a U.S. recession followed sometime in the next 22 months.

So, is the U.S. headed for a recession? Maybe, and the chances increase everyday as the U.S. economy is in the midst of the longest economic expansion (without a recession) in our nation’s history.

Could the yield curve inversion be a false signal this time around? Also, a maybe.

With term premium or the added yield investors demand to park their money in long-term Bonds declining for over 30 years, it’s more likely to see yield curve inversions today. And with global yields collectively at 120-year lows and negative around much of the globe, money is literally pouring into our Treasury market as our anemic 1.59% 10-year yield is relatively attractive.

The chance of a recession in 2020 has climbed to about 30%. It will be interesting to see what happens with a couple of Fed rate cuts before 2019 ends.

A U.S./China trade deal, while not likely soon, would go a long way to help lift uncertainties and help many global economies possibly avoid recession.

Bottom line: the risk of recession has risen, but we are not seeing a recession in the cards at the moment. Being the cleanest shirt in the laundry, the U.S. is attracting investment dollars in droves and helping cause an inversion. Home loan rates have not declined further as the gains in the Bond market have been limited to the Treasury market. So if you are in the market to either buy a home or refinance, today is a great day to do so.

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