The inverted yield curve has been historically predictive of an imminent economic downturn – having appeared before each of the last seven recessions. No matter, says Goldman Sachs.
An inverted bond-yield curve is widely regarded as the sign of an oncoming recession.
Jan Hatzius, Goldman's chief economist, said"overly pessimistic" economic forecasts have put more pressure on long-term rates than is justified. It's a graph that plots interest-rate returns on debt securities across maturities – and its inversion, where short-term yields top long-dated ones, is widely regarded as the signal for oncoming economic contraction. Inverted bond-yield curves have successfully predicted every US recession in the past 60 years.The US Treasury yield curve has remained inverted for a year now, fueling fervent predictions for a recession.
Hatzius explained that the term premium in the bond market had been much lower than its long-term average, so the yield curve inverted more readily than in the past – and didn't require investors to bet on steep interest-rate cuts for it to do so.
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