Parade Of Warnings

The yield curve inverted in both the UK and US this week

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What's going on?

There was another “yield curve inversion” on Wednesday, but this one happened in both the US and UK – and to particular government bonds. This could signal the beginning of the end… of current economic growth (tweet this).

What does this mean?

Yields of long-term government bonds are typically higher than those of short-term bonds, partly to reflect the greater risk of an investor not getting repaid. But investors feeling antsy about the immediate economic future will instead favor longer-term bonds, pushing their prices higher and yields lower (the two always move in opposite directions).

Investors seemed shaken by Wednesday’s raft of disappointing economic data (more in the next story 👇), so demand for ten-year British and American government bonds rose. That led to their yields sinking below those of two-year bonds – in what’s known as a yield curve inversion. Inversions aren’t new, but a “two-ten inversion” has preceded every recession in the last 60 years.

Why should I care?

For markets: Investors ditch stocks.
Apparently unconvinced by Tuesday’s tariff announcement, investors sold off shares on Wednesday – though the price swings might’ve been more noticeable because August vacays typically keep buyers and sellers busy. Instead, investors’ bond-buying (of new and existing ones) pushed even 30-year bond yields to record lows. Coworking space giant WeWork might rue its timing: it’s just confirmed plans to join the stock market, but share-hungry investors may now be harder to come by.

For you personally: There’s good news and bad news.
The good news is you probably needn’t worry – not yet, at least. History suggests a US recession usually happens two years after a two-ten inversion, though enough investors selling simultaneously might cause a “bear market”. The bad news is that products are getting more expensive: according to Wednesday’s data, July’s higher-than-forecast US price rises were followed by a UK hike. No one thought to tell Macy’s – the department store chain missed profit expectations after relying on discounts to make sales.

Originally posted as part of the Finimize daily email.

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