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Are Recession Fears Overblown?

Recession-fears-overblown

All the talk in the financial news media lately has lots of people wondering if a recession is just around the corner. Here’s the inside scoop:

Long-term government borrowing costs are now lower than short-term government borrowing costs. This is called an "inverted yield curve." Normally it’s the other way around because bond investors typically demand a higher rate of return (yield) the longer their money is tied up. When the yield curve is inverted like it is today, it’s almost as though the “smart money” is burying their money in the ground for a long time and fleeing to the hills for safety. In fact, the government bond yield curve inverted prior to the last seven recessions in the US.

But don’t jump to conclusions just yet! There’s always another side to the story. Here are two unique circumstances surrounding the current inverted yield curve that were not around during previous inverted yield curves:
  1. Central Bank Intervention. Central banks across the world have been the largest buyers of government bonds in order to keep interest rates low and stimulate their economies. For example, the Fed now owns a staggering $2 trillion worth of US government bonds. This has had the impact of artificially driving down long-term government bond yields. It’s hard to tell what the yield curve would look like if the Fed suddenly dumped their government bonds onto the market.
  2. Negative Global Bond Yields. A whopping $15 trillion of government bonds across the world, or 25% of the market, now trade at negative yields. This makes US government bonds super attractive because earning even 1% or 1.5% in a long-term US government bond is better than losing -0.5% in a long-term foreign government bond. Ironically, Jyske Bank, Denmark’s third-largest, has now started to offer a 10-year home mortgage at -0.5%. This means they’ll actually pay you by reducing your balance for taking out a mortgage with them on a house in Denmark! Click here to view details on the bank’s website (in Danish, of course).
For these two reasons, the current inverted yield curve may be sending a false signal. As for negative mortgage rates, maybe we should all move to Denmark. Danish mortgage anyone?