BZ Chart Of The Day: Why This Chart Spells 'Recession'

BY Benzinga | TREASURY | 08/09/22 04:04 PM EDT

The yield curve is the most inverted that it has been since 2000. This could be a sign of recession. It has been an accurate indicator in the past.

The amount of a dividend that a bond pays is fixed. So as the price of the bond fluctuates, so will the percentage yield.

Related Link: US Treasury Yield Remains Inverted After Solid Jobs Number: Will The Economy Tip Into A Recession?

For example, if a bond is issued at $100 and pays a $9 annual dividend, it would be a 9% yield. Now suppose the price of the bond falls to $90. The yield would be 10%. And if the bond went to $110, the yield would be 8.1%.

Typically, the longer the maturity of the bond, the higher the yield. But this isn't the case with a yield curve inversion. Now the two-year rate is higher than the 10-year yield.

This occurs because bond traders aggressively sell short-term bonds and buy long-term ones. They think the short-run economic prospects aren't good, but the longer-term picture looks OK.

Their aggressive selling of short-term bonds pushes their yields higher. The aggressive buying of long-term bonds pulls their rates lower. When these two rates cross, they are said to be inverted. 

Historically, these conditions have been a good predictor of an upcoming recession. It may happen again.

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.