The yield curve today is so deeply inverted that recession writing is on the wall. Let me explain

What is an inverted yield curve?

In short, when short term treasuries(2-years) gives higher yield than long term treasuries (10-years)

This is unusual because longer term treasuries should carry higher risk become of the long time-line and therefore should give higher yields to compensate such risk taken by investors.

Therefore when an inverted yield occurs there are implications which I will explain.

What always follow after the yield curve inverted? Recession

Historically, an inverted yield curve tells us there is a pending recession coming. Short term treasuries giving higher yield shows that investors are not optimistic about the outlook short term and are pouring into long term treasuries thus causing long term yield to fall.

Since 1970 every yield curve that inverted is followed by a recession. I pulled up the yield curve chart from St Louis and matched it with the recession that occurs after the yield inverted. 

1980 : The Iran and Volcker Recession, January 1980–July 

1981 : Double-Dip Recession: July 1981–November 1982

1990 : The Gulf War Recession: July 1990–March 1991

 2000 : The Dot-Com bubble Recession: March 2001–November 2001

2006 : The Great Recession: December 2007–June 2009

My thoughts

Although an inverted yield curve doesn't mean that a recession is guaranteed, the past 10 recession has always have the yield chart inverted occurring. 

Some might argue this time round will be different with all the lessons learned historically the FED today will be avoid past mistakes and steer us into a soft landing and avoid a recession. 

But like I say from the start, the writings are on the wall, chart in this case. It would be better to be prepared than caught panicking. 

Built up cash reserve, stay out of margin so that when opportunities comes we can accumulate great companies in our stock portfolio. 

For those hedging, might be a good time to look into defensive stocks that are recession resistant. 

$S&P 500(.SPX)$ $Tesla Motors(TSLA)$ $Costco(COST)$  

@MillionaireTiger  @WallStreet_Tiger @TigerStars