Home Latest News UK and U.S. Bond Yield Curves Invert For First Time Since 2008

UK and U.S. Bond Yield Curves Invert For First Time Since 2008

by Paul

Equities markets have hit turbulence today with investors spooked by the yield curves of UK and U.S. government debt inverting. A yield curve inversion is when long term debt such as 10-year bonds offer a lower yield than shorter term debt.

Under normal circumstances, long term bonds offer a better yield than short term bonds because of the theoretical higher risk of locking up cash for a longer time. But this morning the yield on 10-year UK government Gilts dropped 3.1 basis points to 0.467%. That coincided with 2-year UK government Gilt yields improving by 0.9 basis points to 0.473%. The same with happened yesterday between 2 and 10 year U.S. Treasuries.

The last time U.S. Treasury yields inverted was 2007. It was 2008 in the case of UK Gilts and while a yield inversion is certainly not a guarantee of a coming recession, it has in the past proven to be a reliable signal. George Buckley, a UK economist at investment bank Nomura explained just why investors are so concerned this morning:

“Over the past 40 years every recession in the US has been preceded by a curve inversion and there have been no instances where the curve has inverted and there has not been a recession.”

A yield inversion has not been quite such a reliable omen in the UK and has in the past happened, as in 2008, without a recession eventuating. It can be presumed that investors made a leap for the bolt hole of long term government debt yesterday, pushing down yields, on a spate of gloomy economic data. Chinese manufacturing output growth dropped to a 17-year low and Germany’s usually resilient economy contracted in the second quarter.

While certainly something to keep a close eye on, investors would do well not to presume that the current yield curve inversion on both sides of the Atlantic is a bullet-proof argument a recession is inevitably on our doorsteps. While U.S. yield inversions have preceded 7 of the past 9 recessions, it’s certainly not a perfect indicator. Many analysts and economists have also pointed to the fact that the huge central bank bond-buying programmes conducted since the recession as part of quantitative easing strategies to stimulate the economy with injections of cash could well have distorted bond markets.

There are a number of indicators pointing to a slowdown in global economic growth and there are risks to the downside in financial markets. But that doesn’t mean an actual recession is inevitable.

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