Is it 2008 all over again?

The US Treasury Bond Yield Curve, which inverted for the first time since 2007, brought back fears of the recession which preceded the decade long bull run which we have been enjoying.

What is an Inverted Yield Curve? When the Yield Curve is inverted, it indicates that the returns on the short term notes are higher than the returns on the long term bond. The yield curve on the 10 year treasury bond was at 1.623% as on 16th August, 2019, whereas the return on a 2 Year Note was at 1.634% which indicates that the short term returns were higher than long term ones.

The reliability of the curve is often questioned though. In the recent past, the inverted yield curve has successfully indicated 7 of the past 9 recessions, only failing in 1966 and 1998. Recessions have followed 18-22 months after the inversion of the curve. It should be duly noted that the inversion is merely an indicator of a global economic slowdown and not a cause itself.

The inversion of The Yield Curve has instilled fears within investors which has led to a downfall in the investments and both FII and FPI’s have not only seen a decline in investments , but also, the existing investments to the tune of Rs. 16,870.13 have been withdrawn from the markets in July 2019 alone. The markets have been reflecting these fears as well.

At a time like this, words of wisdom are dawned by White House Trade Advisor Peter Navarro who said, “Technically we did not have a yield curve inversion.” Supporting his statement, he referred to the flatness of the curve as a non – indicator of an inversion in the yield curve.
“An inverted yield curve requires a big spread before short and long,” Navarro said. “All we have had is a flat curve.”

Taking all possibilities into consideration, what does this inversion reflect?

The sinking German Yield Curve, which has been falling for the past 6 months, Japan’s increase in it’s US Treasury holdings and surpassing China as the largest Non US holder of US Treasuries, or the frequent escalation and de-escalations of the US – China Trade War, are all other theories which have been attributed to the inversion of the Yield Curve.

In India, a number of other factors, have spooked investor sentiments and sent the country into an economic slowdown. The governments overseas -bond issue and Infrastructure investment plans (of 1 Lakh Crore over 5 years), all indicate this.

After becoming the fastest growing economy, India still lags behind in the race of creating employment. With the second highest population in the world of over 127 Crore people, the labour force hasn’t been utilised to it’s full potential. The economy itself reflects this, with the recent slowdown also instilling fears. Major sectors such as Automobile and Infrastructure have been witnessing slumping sales and piling inventory recently.

With slowdown and unemployment woes shaking the economy, are we really headed towards another recession or will this be the third time the inversion proves wrong?