Financial encyclopedia

Since the beginning of this year, the yield curve of the United States has shown the most serious inversion in more than 40 years, and the market is worried that the economic recession is coming.

What is debt interest upside down?

Generally speaking, the longer the maturity of a bond, the greater the risk and uncertainty it bears, so the higher the bond interest rate will be. On the contrary, the shorter the maturity period, the lower the bond interest rate will be. When we reduce the long-term bond income from the short-term bond interest rate to less than zero, it means that "the bond interest rate is upside down". The market most often uses the spread between the yields of 2-year and 10-year US government bonds as the bond interest rate.

Observation index of upside down.

Earlier, the Federal Reserve published a study, which pointed out that they used the three-month period and Lebanon 10 years ago as a reference. It is worth mentioning that if these two figures are used as a reference, every time there is an upside down, there will definitely be a recession within three to eight quarters, which is extremely informative.

Normal: long-term bond yield > short-term bond yield

Abnormal: short-term bond yield > long-term bond yield

A sign of economic recession?

A few months after each debt-interest inversion, the American economy will experience recession. For example, in the internet bubble in 2000 and the financial tsunami in 2008, debt-interest inversion occurred, followed by a stock market crash and a great recession, which is why the market interprets debt-interest inversion as a signal of economic recession.

How should investors respond?

Assuming that this theory is still feasible, investors should be careful of the possible recession risks, pay more attention to asset allocation, and lay out more diversified assets. Gold with a safe-haven role is naturally a choice for many investors.