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Monday, 23 May 2022

The Yield Curves Before the Recession

22 May 2022

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Investors and stock analysts have always been watching the yield curves carefully,  looking for inverted yield curves in order to foretell the health of the present economy of a country.    This is because it has been proven many times that a country having an inverted yield curve will usually have a recession in the making.   


There are 3 occasions in the past 22 years that the US has had its yield curves inverted just before the recession in the years 2001,  2008 and 2019 as shown in the following charts.

The 3 charts are quite similar except the chart for 2019 has had the lowest yield range of less than 3.0%.   This recession in the year 2019 was short and could not have been possible without the 3.4 Trillion stimulus economy rescue package introduced by the US Government in March 2020.  

How does the Yield Curve Look Today?

Presently,  the US's yield curve does not look as perfect and as good as in March 2021 or about 1 year ago.  The present yield curve has an inversion between 20yr and 30yr.  There is also another inversion between 5yr and 10yr.

The present yield curve could have been affected by the Fed's news around September 2021 that it was ramping up Fed Fund rates and carrying out Quantitative Tightening.   In the Fed's plans,  they said the Fed Fund rates will be increased 6 or 7 times and about USD 95 billion per month will be removed from the US's monetary system until further notice.  

How do present Yield Curves compare?

The US's yield curve looks about the same as China's yield curve except the US's yield curve is much flattened above the 2yr.  They are definitely much better than Russia's yield curve which is inverted right now.

One can see from the above chart that the US's yield curve was quite normal about 6 months ago whereas China's yield curve had never changed much.   Russia's yield curve had been inverted.  It looked better about 6 months ago and must have been affected badly by the Ukraine war that started in February 2022. 

Will there Not be a US Recession in the US?

US might face a recession if the Fed is so stubborn to continue carrying out Quantitation Tightening (QT) indiscriminately,  ignoring the signals of the economy and losing control of the monetary system, thus allowing the US economy to take its "dives down the cliffs".  

If the past US recessions in 2000,  2008, and 2019 can be a guide,  one can be assured if there is a recession it will not be too serious.  Like the recession in 2019,  Fed could always halt the QTs and reintroduce QE again to stimulate the economy.  Fed has enough monetary tools to tame inflation as well as recession

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.


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