Keep An Eye on the Yield Curve

This is more than a bit wonky. As the U.S. economy hits a new record for economic expansion, the age of the business cycle is making people worry about the next recession. That’s not a bad thing. The longer expansion continues, the closer we are to the next recession. One of the indicators that is getting more airplay these days is the inverted yield curve. I don’t blame you if you can’t get too motivated to get to know this indicator but here’s the thing: an inverted yield curve has preceded the last three recessions and seven of the last eight.

We’re going to devote an article to the yield curve in the July/August BreakingGround but here’s the short-hand version until then.

The yield curve describes the difference between the interest rate on short-term and long-term government loans (or bonds). The long-term bonds should have higher rates because there’s a greater risk of something (like inflation) eating at the money you get repaid as time goes on. When the long-term rates are lower than short-term rates, the yield curve is negative or inverted. There’s a whole technical explanation in BreakingGround (and on the Internet) but the short version is that the yield curve inverts when lots of people are nervous about the economy and invest in long-term bonds with lower rates. The longer this situation lasts (see the red line below the white one below), the more likely that a recession will occur within 6 months to 2 years. It also makes it more likely that the Federal Reserve Bank will cut rates in July. That will make the economy happy, at least for a while.

 

 

 

 

 

 

 

 

PBX reports that March Westin has early bid packages out to bid on the $60 million Hodges Hall renovation at WVU.  The PBX also reports that Al. Neyer will start construction late summer on the $39 million first phase of its new office building at 21st & Smallman.Dick Building Co. was awarded the contract for the $2.7 million TI for Industrious at Liberty Centre. A. Martini & Co. will be doing $1.8 million renovations to PPG Wintergarden’s event space for Bottle Management (the company that developed City Works restaurant). Jendoco Construction has started on the new $5 million exhibit and office for Contemporary Craft in Lawrenceville. Shannon Construction was awarded the contract for the shell and core renovations at Station Square.

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4 responses to “Keep An Eye on the Yield Curve

  1. That was a helpful 60-second description of the yield curve, thanks!
    Sarah

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  2. I am not as concerned about an inverted yield curve as a the possibility we join many countries like Germany who have negative yields. Right now we are attracting huge cash flows from around the world with a combination of 2% yields and a relative safe haven. With our level of National Debt we are setting on a disaster. With the level of cash available we now have anemic capital expenditures. I just hope we can continue to grow our economy to use this cash and reward investors or we will be in a world of hurt if the cash flows dry up. Right now stocks give the best yields but are we going to create a huge bubble with all the cash inflows?

    • Bubbles almost seem inevitable. It’s the artificial bubbles that have been the killers. US economy is surprisingly balanced for an investor. Yields for cash, real estate, bonds, stocks, are all pretty even on a risk-adjusted basis. None of the returns are close to historical norms for asset classes but we have been extraordinary to norms since the 2008 crisis. Can’t see negative yields coming (of course, I doubt they did in Germany or Switzerland either). Agree 100% about capital investment. Surprising amount of cash on the sidelines for where we are in the cycle. A lot of times, that is an indicator of its own.

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