The New York Times‘ Matt Phillips covers the latest Wall Street concern which may impact the rest of us:
The so-called yield curve is perilously close to predicting a recession — something it has done before with surprising accuracy — and it’s become a big topic on Wall Street.
Phillips explains that the yield curve is the difference between interest rates on short term and long term US government bonds, taken over time. Interest rates are set through the dance of bid-ask – that is, if there is insufficient demand for a bond offering at a given interest rate, then the rate has to be boosted by the seller in order to make it attractive to buyers.
Matt explains why long-term bonds have higher rates:
Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation.
If, on the other hand, a collapse in prices is suspected by the bond traders as a whole, then the higher interest rates are not necessary to entice their dollars[1].
Which is a long-winded way of saying that the bond market is getting very nervous about the future. Since the GOP is currently running things, and is so completely incompetent at actual governance that they aren’t even capable of botching it, it’s a telegraphed signal of under-confidence in the current leadership.
In other words, we may indeed be seeing the Trump Recession in the future.
Take a look at the article, it’s interesting and has a number of caveats I’ve chosen to omit. And it makes sense that bond traders are getting nervous, given the ludicrous hijinks taking place in Washington.
1All of this is predicated on the notion that the US Government always pays off its bonds. There have been enough sacred cows found shot behind the barn during this Administration to make this bit of traditional wisdom just a wee bit suspect, in my amateur opinion.
