Yield on U.S. Bonds Says a Recession Could Be Nearing
A recession could be looming for the U.S. economy. Don’t let the optimism in the mainstream media convince you that economic growth is ahead. And if you hold stocks, be very careful.
There’s one recession indicator that shouldn’t be ignored, given that it’s flashing red: the yield on long-term and short-term bonds.
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You see, economists look at the yield on bonds to determine where the economy could go, using the difference between the yields as a determinant. The lower the difference, the higher the chance of a recession.
So, if the yield on short-term bonds is rising and the yield on long-term bonds is declining or flat, it says that the economy could be stalling and that a recession could be likely.
Sadly, this is exactly what we see happening with U.S. bonds these days. The yield on short-term bonds is soaring, while long-term bonds are relatively flat.
To give you some perspective, in the past year, yields on two-year U.S. bonds have almost doubled. In the same period, 10-year bonds yields have increased just 36%. This is troublesome. If you are expecting economic growth, you want to see both of these yields moving in line.
Look at the chart below; it shows the difference between the yields on 10-year U.S. bonds and two-year U.S. bonds.
Chart courtesy of StockCharts.com
This difference in the yields is very interesting. Whenever it gets close to—or drops below—zero, a recession follows a few months later.
This chart shouldn’t be new to frequent Lombardi Letter readers. It has been mentioned here before. This difference has predicted the last two recessions very accurately.
As of mid-June 2018, this difference is getting very close to zero, very quickly. As such, one has to wonder if the U.S. economy could be closing in on a recession.
What’s Ahead for the U.S. Economy?
We are seeing a significant amount of economic optimism across the board in the mainstream media. We are told on a daily basis that everything is fine and that growth is fully intact.
But don’t be fooled; the U.S. economy could be close to a recession. Problems seem to have been overlooked.
Mind you, yields on bonds are not the only flashing warning signs for the U.S. economy.
It’s impossible to predict the exact timing of a recession, but it will not be shocking if data starts to show a slowdown in late 2018 and early 2019.
What Should Investors Watch Out For?
If an investor has enjoyed stellar gains on stocks over the past few years, it might be a good idea to step back a little and focus on capital preservation. This doesn’t necessarily mean selling; it could be as simple as setting stop losses on existing positions.
Why? Because stock markets top before a recession and bottom just before a recovery begins. If we are closing in on a recession for the U.S. economy, we could be seeing indices like the S&P 500 and the Dow Jones Industrial Average form tops sooner rather than later. A sell-off could be brewing.
