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- The yield curve is currently flashing red, indicating a potential economic downturn, but unique employment conditions and increased awareness of the yield curve as a predictor might mitigate the risk.
- The recent volatility in the US government bond market, driven by uncertainty surrounding interest rate hikes and overall economic conditions, has resulted in risk aversion, reluctance to make investment decisions, higher borrowing costs, and tighter lending conditions.
Deep dives
The Yield Curve Predicts Recessions
The yield curve, an economic indicator that has accurately predicted every recession since 1969, is currently flashing red. When the yield curve inverts, with short-term interest rates higher than long-term rates, it historically indicates economic downturn. This has happened at the end of 2022, and it has persisted. However, there are factors that suggest this time might be different. The unique employment situation, low levels of debt compared to the 2008 recession, and increased awareness of the yield curve as a predictor might mitigate the risk of an impending recession. The actions of the Federal Reserve, particularly their decision to continue raising interest rates, could heavily influence the outcome.
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