The US Treasury Yields are inverting again after doing so in 2022. This has raised recession fears in the market and for a good reason. Whenever the USD Treasury Yield inverts, it usually means that short-term interest rates are higher than short-term ones. This usually makes it more costly for businesses to borrow, resulting in a recession. In essence, now that the yield curve has inverted, economic activity could slow down in the short to medium term.
So, what should investors do under current circumstances? For starters, this could be a good time to learn how to invest in bonds. That’s because, with high rates, investors can earn more from bonds, which is risk-free passive income. However, if events between 2022 and now are anything to go by, then there is always a chance that the yield curve could turn normal again quickly and hurt bond investors.
As such, before rushing into bonds for the high yields, it is important to know the other key pointers to a potential recession. If a few of them tick the box, then a recession is imminent, and a bond investment is the best decision.
The key indicators of a potential recession, besides an inverted bond yield curve, are below.
Increased Volatility In the Stock Markets
One of the best indicators of an upcoming recession, especially in a market where bond yields rise, is increased stock market volatility. When the stock markets become highly volatile, investors don’t have confidence in the underlying market fundamentals. This is quite evident in the US stock markets at the moment. The US stock markets are increasingly volatile, with the first week of August recording some of the most significant single-day losses in almost a year. This increased volatility makes bonds look increasingly more attractive and reinforces the argument for a potential recession soon.
The Sentiment Of Business Leaders
The sentiment of business leaders is another key indicator of the economy’s overall direction. That’s because these people interact directly with the various aspects of the economy, such as how fast products are moving and production costs, among others. Business leaders have increasingly turned bearish for a while now, and many believe that the US economy could be headed for a recession. Such negative sentiment further strengthens the case for holding bonds over stocks until things clear up.
The Global Economy
The US economy does not operate in isolation. It is part of the global economy; if it struggles, the US will likely struggle. At the moment, the global economy is struggling, and it partly has to do with an increasingly strong dollar. As the US dollar rises due to the Fed raising interest rates, most countries are finding it hard to buy products from the US. This means US companies that thrive on exporting products globally have to contend with slowing demand. With a slowdown in the Fed, rates hike still not close, the odds are that things will get harder for the world economy and could plunge the US into a recession.
Geopolitics have a direct impact, as became evident in 2022. The start of the Russia-Ukraine war also marked the beginning of a drop in US stocks that lasted for most of the year. Even without open warfare, the ongoing deterioration of relations between the US and China could trigger a recession. That’s because the two country’s supply chains are deeply integrated, and the more it is disrupted, the more the business costs rise.
The bond yield curve is inverted, raising the risks of a recession in the US. While this presents an opportunity to invest in bonds, looking at the potential for a downturn more broadly before going all in on bonds is always best. Among the key factors to consider are geopolitics, the world economy, and the sentiment of business leaders.