Here’s what the ‘yield curve’ tells us about the state of the US economy -- and how soon a recession might be coming: report

In the financial world, the term “yield curve” refers to the yields on bonds of various maturities. How long a U.S. Treasury bond takes to mature depends on the bond; some mature within months, while others take years. The yield curve can be used to analyze the state of the economy, including how soon a recession might be coming. And Axios’ Dino Rabouin, in a report published on June 28, uses the current yield curve to access how soon the U.S. might be entering another recession.

Rabouin observes, “The U.S. Treasury yield curve has now been inverted for more than a month, meaning the three-month bill is paying a higher interest rate than the ten-year note.” And he explains why this information is important.

“An inversion of treasury bond yields is a near-perfect recession indicator that economists at the Federal Reserve recently called ‘the best summary measure’ for an economic downturn,” Rabouin notes.

Rabouin offers some additional explanation, observing, “Investors demand higher payment for loaning out money for longer periods of time. Bonds are essentially loans; so, it follows that a bond that does not return a lender’s cash for ten years would pay more than one that returns the cash in three months.”

The Axios reporter goes on to point out that the yield curve in the U.S. “inverted in March and in May, but for very short periods of time,” adding that “other parts of the curve inverted as far back as December.”

After the Great Recession — which was the worst economic downturn in the United States since the Great Depression of the 1930s — millions of Americans are understandably nervous whenever they hear the word “recession.” The Great Recession was so painful that back in 2009 and 2010, those who saw their net worth plummet and lost their homes along with their life savings asserted that it felt more like a depression than a recession. President Barack Obama clearly inherited the worst economy in the U.S. since President Franklin Delano Roosevelt was sworn into office in 1933 following his landslide defeat of incumbent Republican President Herbert Hoover in 1932.

But some recessions are worse than others, and it remains to be seen when the next recession will come in the U.S. — and how bad it will be. If the U.S. goes into a recession in 2019 or 2020, it could have major implications for President Donald Trump’s reelection campaign. Although President George H.W. Bush enjoyed stellar approval ratings in 1990, he was voted out of office in 1992 after the U.S. economy took a nosedive. Thanks to the state of the economy, Bush went from being a very popular president to giving a concession speech to President Bill Clinton.

Rabouin, however, stresses that a yield curve inversion “doesn’t signal a recession is coming immediately. Typically, it takes six to 24 months after an inversion for a recession to begin.”

In other words, a recession may not happen in 2019 or 2020. So Trump, possibly, could still be bragging about the state of the U.S. economy on Election Day next year when he goes up against a Democratic nominee — be it Sen. Kamala Harris, former Vice President Joe Biden, Sen. Elizabeth Warren, Sen. Bernie Sanders or someone else.

“It’s not time to put money under the mattress just yet,” Rabouin asserts. “Many market watchers, including top economists and some of the world’s biggest asset managers, believe that the extraordinary measures the Fed took after the Great Recession have fundamentally altered the market — and things are different this time. However, many of them said things were different when the yield curve inverted in 2000 and 2006, too.”