Recession indicator flashes red for first time since 2005 – AOL


The market’s most closely watched part of the yield curve inverted today, and if its record over the last half-decade is any indicator, the U.S. could be headed for a recession soon.

Shortly after 6 a.m. ET on Wednesday, the yield on the 10-year U.S. Treasury bond dipped below the yield on the 2-year U.S. Treasury as the 10-year fell 1 basis point below the 2-year. The yield curve inversion has a strong track record of predicting a recession; each of the last seven recessions (dating back to 1969) were preceded by the 10-year falling below the 2-year.

The last time the yield curve inverted was in December 2005, about two years before the financial crisis sent the economy into recession.

Concerns over a global slowdown, in addition to uncertainties from the U.S.-China trade war, have weighed heavily on longer-term U.S. Treasury yields. Since the new year, the return on the longer-term 30-year Treasury has fallen from a high of 3.12% in March to 2.08% on August 14.

Bond yields across the board have come down over that same time period, as investors move funds from more aggressive yielding securities into risk-off assets like gold and U.S. Treasuries.

Yields came down precipitously in August amid a mix of global concerns: President Donald Trump threatened new tariffs on China, an Argentinian election renewed worry over its debt crisis, and protests escalated in Hong Kong.

Morgan Stanley wrote August 12 that unless economic data tor U.S. equity earnings turn around, “the bear is alive and kicking.” Their note adds that investors should be careful about equity markets, recommending staples and utilities stocks amid recession risks.


What Does a Recession Mean for Consumers?

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With the threat of a recession looming above us, Americans are beginning to ask: What would a recession mean for me and my family?

The experts at take a look at how a recession could impact 13 facets of your financial life — and what steps you should take to make it through the economic storm.

Click through our gallery to see what to expect and what you should or shouldn’t do during a recession.

Next: If You’re in Retirement …

“These are the people who are most likely to be impacted by the decline we’ve seen in the stock market. The closer you get to retirement, the more of your assets should be shifted over to things that aren’t going to lose their value. You’re trying to preserve the value you’ve accumulated,” says Tracy Clark, an economist with the W.P. Carey School of Business at Arizona State University.
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Next: If You Own Stocks …

Don’t panic and start selling just because you hear warnings of a recession. You may be locking in losses that are not necessary, especially if the assets in your portfolio are being held for the long-term and you won’t need them for ten or more years.

More on Recession & Your Stocks

Next: If You Have a 401(k) …

Unfortunately, it’s impossible to “recession-proof” your 401(k), because no sector is immune from an economic slowdown. You can, however, take some precautions to limit the damage. For one thing, stay the course. Unless you are in dire financial straits, don’t cut back or quit contributing to your retirement fund.

More on Recession & Your 401(k)

Next: If You Need a New Car …

With recession fears growing, it might not seem like a great time to think about a new car. But if you want (or need) a new vehicle you might actually be able to benefit from the challenging economic conditions. The combination of desperate auto makers, motivated auto dealers and lower interest rates makes it an auto buyers market.

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Next: If You Started a New Biz …

If you’ve recently started your own business, the potential for a recession may have you in a panic. But there are ways to try to weather the storm. For example, try to diversify. Look for new types of customers or a new way to market your offerings. Also, continue to market yourself. It’s tempting to cut back on advertising while money is tight. But, in fact, a downturn may actually require more marketing efforts to stay in the game.
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Next: If You Need a Loan …

While a recession creates many economic woes, those who are in the market for a loan (mortgage or otherwise) can often find value during these times. Rates are low, which makes it a great opportunity to refinance your house or tap your home equity to fund a long-term worthwhile venture. There are some cautions, though. Click the link for more advice.

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Next: Consolidate Debt?

But for all but the most disciplined and job-secure of folks, consolidating your debts into your mortgage in a recession environment is possibly the worst thing to do. If rates should go up, or you suffer a sudden income reduction, it will be much harder to cover your mortgage payments. Plus: Having a clean slate with credit cards often has the wrong effect on people.
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Next: If Bank Has You Worried …

Your bank accounts are FDIC-insured up to $100,000, but if you are staying up at night worrying over the solvency of your bank — move your money. Why? Most banks are similar enough that there’s really no reason to keep money with one that makes you worry.

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Next: If You Have Card Debt …

To protect your family and your finances during these very uncertain times, it is critical that you batten down the hatches and prepare to ride this out. One critical way to do that is by tackling your credit card debt. You DON’T need a lot of money to make an immediate dent in your debt. Armed with three simple steps and even $10 extra a month, you can take a big bite out of your credit card debt. Click on the link to get started.
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Next: Buying a House

Now may be the right time to begin investigating your home-buying options. We are in the throes of a double downswing of the costs associated with entering the single family home market. As real estate prices are deflating regionally, the interest rates on first mortgage loans to buy those properties are at rock-bottom levels. Deflated real estate markets aren’t always bad things, when you’re in the mood to buy some. Click below to see some of the things you should consider if you want to buy in today’s climate.
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Next: Heading to College

Parents of college-bound seniors everywhere are blanching. A lot of financial ugliness is coming down the pike, and here you are, ready to be hit with a whole new phalanx of expenses. What’s a parent to do? Strongly consider the community college option. Unless your kid got a full ride to their first pick university, It makes too strong financial sense not to examine this option closely.

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Next: Short on Cash

Freelance writers frequently lead a feast or famine lifestyle. Out of necessity, they learn how to prepare for funds running low. Here are some of their key tips: First off, in feast times, have a stash of cash, a couple hundred dollars tucked deep away. When you have NO MORE money at all, this stash will buy your kids’ their milk and you a gallon of gasoline. Other tips: Save all change, know thy pawnshops, babysit or teach a class, if you’ve got skills to share.
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Next: If You’re Laid Off …

First things first: File for unemployment immediately. Don’t miss any benefits you’re due. Get some help with your resume and begin your job search right away. Then take a hard look at your family’s budget and see where you can immediately cut costs. Come up with a worst-case scenario budget.
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“Growth stocks look more vulnerable than defensives,” Morgan Stanley wrote.

In an August 13 note, Bank of America Merrill Lynch warned that equity investors should not expect the stock market to turn sour immediately, as the S&P 500 has a tendency to experience a “last gasp rally” to a new peak after dipping.

BAML points out that it can take eight and 24 months for a recession to hit after the 2-year and 10-year curve inverts. They warned that an inverting yield curve means equities are on “borrowed time.”

Fed action

The Federal Reserve may have hoped that cutting rates in its July 31 meeting would have helped the yield curve steepen, since the shorter end of the curve closely tracks where the federal funds rate is.

The day after the Fed lowered rates, the 2-year bond did come down and widened slightly against the 10-year, widening the spread to 17 basis points.

But trade developments the Monday after clobbered bonds and began the fall into inversion, raising questions about whether or not Fed would be backed into a corner and forced to aggressively cut rates in its remaining meetings this year.

Fed Chairman Jerome Powell has grappled with interpreting the yield curve over the past few months. In early July, Powell told Congress that bond markets “reflected the real concerns that arose really beginning in May,” referencing the slowdown in U.S. business investment and broader global concerns abroad.

On that day, July 11, the spread between the 2-year and the 10-year was 28 basis points. Powell attributed the curve’s shape to the central bank’s signal in its June 19 meeting that it could cut rates.

“We’ve signaled that we’re open to doing that,” Powell said in reference to the rate cut that eventually came a few weeks later. “You’re seeing that in the curve now.”

The yield curve

The inversion of the 2-year and the 10-year reflects bearish expectations for the economy.

Bond yields are driven by demand, and the more demand there is for a given bond, the lower the yield will be (since the security would not need to pay out as much for investors to want it). When economic conditions deteriorate, investors may pour money into longer-term Treasuries (10-year) due to concern over events that could transpire in the short-term. Thus, shorter-term Treasuries (2-year) would offer a higher yield compared to the more desired longer-term bonds.

Other parts of the curve have already inverted. In December, the yield on the 5-year Treasury note fell below the yield on the 3-year note. In March, the yield on the 3-month Treasury bill slipped below the yield on the 10-year note.

Investors watch the 2-year and the 10-year most closely because they are considered to be the most liquid bond markets, meaning that an inversion would reflect a more widespread bearish sentiment compared to moves in other parts of the curve.

Although its predictive track record is strong since 1969, it failed to predict recessions in 1954 and 1965. Economists have also pointed out that the yield curve does not in it of itself cause a recession, but rather measures sentiment in the economy that makes it a decent bellwether for one.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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