Investment Clock insights

Is the yield curve about to invert? Is the US recession on the way?


Trevor Greetham 

26 July 2018

The US yield curve continues to flatten, reaching the lowest levels since the Great Financial Crisis. US recession usually follows an inversion of the yield curve, but it is possible for the curve to remain flat for a while before inverting. This is what we saw in the late 1990s, which was the longest business expansion on record for the US (chart 1).

Back then a slowdown in Japan kept commodity prices low (chart 2) and low inflation meant monetary policy stayed loose for many years, helping to boost developed market growth until it all ended with the dotcom bubble. This time around, a slowdown in China has kept commodity prices down and interest rates around the world are even lower than in the 1990s. We think the US Federal Reserve (Fed) will continue to raise interest rates only very gradually and central banks elsewhere are in no hurry to tighten policy. We don’t expect the yield curve to invert soon and also expect this economic expansion to continue in 2019; with this background, we’d be willing to buy dips in equity markets over the summer.

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: RLAM. Tactical positions as of June 2018.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.