Chart of the Month: The Yield Curve is Flashing a Warning Signal
*Shaded areas are recessions
Source: Federal Reserve Board of St. Louis, NBER
While the U.S. economy grew at a solid 3.1% annual rate in the first quarter and many economic indicators still remain strong, concerns over a possible recession have emerged. The latest inversion of the yield curve, where short-term interest rates are higher than long-term interest rates, is sending a powerful signal that an economic slowdown may be coming. Since every recession in the last 50 years has been preceded by an inverted yield curve, Wall Street pays close attention to this powerful indicator. While there is debate among academic circles about which measure of the yield curve has the greatest predictive power, and whether the current spread should be adjusted for the term premium or extra compensation to invest in longer-term maturities (not shown), it would be unwise to ignore this signal, given its historic track record in predicting recessions. With equity markets still hanging onto gains from the sharp correction late last year, it may be worthwhile to review your portfolio to make sure it can withstand another downturn, should one materialize.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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