The payout on short-term and long-term bonds are incredibly low among most developed economies across the globe, and many economists are predicting this drop could be signalling a coming recession.
When citizens buy government bonds, they are purchasing government debt with the promise of a return on their investment. The yield is the “interest rate the U.S. government pays to borrow money for different lengths of time.” The yield influences “the interest rates individuals and businesses pay to borrow money to buy real estate, vehicles and equipment.” Typically, the higher the yield, the better the outlook on the economy.
Global bond markets are largely floundering.
Bond yields are incredibly low in Switzerland, Germany, England, and Japan. Japan is actually experiencing negative interest rates. The Federal Reserve Bank of the United States is keeping interest rates low as well, according to Bloomberg.
The yield curve, which shows the maturity difference between long-term and short-term bonds, has been relatively flat, reports Business Insider. Tom Fitzpatrick, leader of the Citi’s Technical team, said that the levels between US two-year bonds and five-year bonds are very flat and that “the current level of about 35 basis points is the line in the sand.”
Research finds that the yield curve recently inverted, and the last two times that happened it signaled a negative market event and that “a recession is ahead,” reports Business Insider.
George Soros warned in January that the bond market in China could be a signal of a repeat of the 2008 financial crisis, according to Market Watch. Jeffrey Gundlach, founder of DoubleLine Capital, warned that the U.S. “bond market could implode” with widening in maturities since 2014 which could threaten to trigger the next financial crisis.
Mohamed El-Erian, Allianz’s chief economic adviser, said that normally the conditions we are seeing would signal a recession is ahead. El-Erian notes that what is actually pulling down the yield curve “has less to do with the US and has more to do with Europe,” according to BI.
Deutsche Bank analysts, however, say that the current state of the yield curve “implies a 60 percent chance of a recession in the next year based on historical patterns,” reports to the Wall Street Journal. Long-term interest rates in the U.S. hit a record 227 year low in early July.
Experts note that uncertainty will continue until the Fed’s conference in Jackson Hole, Wyoming later this weekend, where the meeting “could lead the market to believe that a Fed rate hike won’t happen before the end of the year and that bull flattening will win out in the near-term,” reports BI.
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