Key Economic Indicator Flashes Signs Of An Impending Recession

Apr 22, 2022

Author: Wassim Dabboussi

Earlier this week we had a bonds market indicator show a sign of an impending recession, this indicator is called the inverted Yield Curve.

This week we saw an inverted yield curve, which is one of the most reliable leading indicators for an impending recession.

Before we understand what this means for us as crypto investors, let’s have a look at what a Yield Curve is and why it is important. 

Investopedia defines Yield Curve as follows: 

“The term yield curve refers to the relationship between the short- and long-term interest rates of fixed-income securities issued by the U.S. Treasury. An inverted yield curve occurs when short-term interest rates exceed long-term rates. Under normal circumstances, the yield curve is not inverted since debt with longer maturities typically carry higher interest rates than nearer-term ones.”

A normal Yield Curve indicates that longer term bonds hold a higher risk and hence attract a higher interest rate.

An inverted Yield Curve indicates that shorter term bonds hold a higher risk than longer term bonds, signalling that we are heading into troubling economic times. 

Since 1950, each recession has been preceded by a negative yield curve, with an exception of 1065-1966, where the negative yield curve was not succeeded by a recession.

Source: The Inverted Yield Curve in Historical Perspective

To learn more about the impact of the inverted yield curve, this article goes into a lot more detail. The Impact of an Inverted Yield Curve

While some politicians, economists and speculators claim that this time it is different, the bottom line is that historically we have seen many portfolios devastated by this thinking.

The smart investors are building their portfolios around long term thinking and long term conviction and not short term movements in the market.

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