The Boy Who Cried "Recession"

<figure><img alt="" src="https://cdn-images-1.medium.com/max/1024/1*tMn_Z023c2bJfgAe–FYvw.jpeg" /></figure><h3>The Boy Who Cried “Recession”: Can Yield Flattening Predict an Economic Downfall?</h3><p>There are many indicators that the global economy might be on the decline in the coming months. Some of the <a href="https://www.marketwatch.com/story/trouble-ahead-what-4-recession-indicators-say-about-the-economy-2017-12-28">indicators </a>that economists will keep an eye on include: the stock market, changes in GDP, and most importantly the flattening of the yield curve.</p><h3><strong><em>What is the Yield Curve?</em></strong></h3><p>The yield curve shows the range between short-term and long-term bond yields or interest rates. Normally, the short-term rates are lower than the longer rates, but as speculation rises about economic growth- or lack of, the short term rates rise anticipating that the Fed will raise the rates. As the short-term bond yield increases and the long-term bond yield decreases the difference between the yield spread diminishes, causing it to “flatten”.</p><figure><img alt="" src="https://cdn-images-1.medium.com/max/467/0*SION-xFhC-kVMTYO" /></figure><p>Although a flattened yield curve tends to reflect the slowing down of the economy, it is not the end all be all. What is more concerning is if the trend continues. When long dated yields fall below short dated yields then the curve starts to become inverted. In the past, an inverted yield curve has been a strong sign that a recession is likely to follow in the near future. Inverted yield curves have predicted many of the last 8 recessions.</p><h3><strong><em>Impact on Banks</em></strong></h3><p>Banks will be the ones taking the biggest hit at the moment. Because banks profit off of long term bonds (loans, mortgages etc..) they can no longer lend on higher long term rates. The flattening and eventually inverting of the yield curve ultimately decreases their Net Income Margins (NIM).</p><p>In the wake of a recession, it might be wise to consider <a href="http://assurehedge.com">alternatives </a>to doing your business with high risk banks.</p><img src="https://medium.com/_/stat?event=post.clientViewed&amp;referrerSource=full_rss&amp;postId=ab82f0672b49" width="1" height="1" alt="" /><hr><p><a href="https://blog.assurehedge.com/the-boy-who-cried-recession-can-yield-flattening-predict-an-economic-downfall-ab82f0672b49">The Boy Who Cried &quot;Recession&quot;</a> was originally published in <a href="https://blog.assurehedge.com">Assure Hedge</a> on Medium, where people are continuing the conversation by highlighting and responding to this story.</p>