AIER: The Inverted Yield Curve and the Next US Recession
Investors have largely ignored the inverted yield curve in U.S. Treasuries in the past few months. Typically, the yield curve is positively sloped. Investors want a higher yield for lending money to Uncle Sam for longer periods of time.
Treasury yield curves invert when investors get higher yields in shorter periods of time. That suggests investors expect future interest rates to be lower. Right now, the yield curve is at its most inverted in history.
Since the 1960s, inverted yield curves have predicted all eight U.S. recessions. That’s a 100 percent win rate. And they’ve had no false positives. That means that there have been no inversions that did not result in a recession.
The last yield curve inversion started in 2019, five months before a recession began in February 2020. That gave investors a warning even before the Covid outbreak turned what could have been a mild recession into a sharp and steep one.
So unless that trend is broken, it’s likely that we could see a recession by the end of 2023 or into early 2024.
Investors can prepare by scaling back on leveraged trades now, as well as investments in highly volatile companies such as tech stocks. And it may be prudent to invest some money in short-term US Treasuries, given the higher yield opportunity there right now.