There was hope again. The Dax has risen by around 1000 points in the past four weeks to over 13,600 points. In the US, the S
But this could all prove to be a bear market rally now, an interim high on the way down. Because the bond market in the US is sending a threatening signal. He predicts a mega recession. And the worst: this indicator has a high accuracy.
Typically, when lending someone money for a long period of time, investors want more interest than they would for a short-term loan. After all, the longer you have to wait for the repayment, the higher the risk of default.
On the market for American government bonds, however, this has now been reversed: Investors are currently receiving a yield of around 2.77 percent for debt securities with a term of ten years, and around 3.21 percent for those with a two-year term, i.e. 0.44 percentage points more. In such a situation, the experts speak of an inverted yield curve – and are alarmed.
“The US Treasury yield curve is and remains one of the earliest and most accurate indicators of a recession,” said Stephen Gallagher, an economist at investment bank Société Générale. While such a downturn does not follow every time the curve inverts, it does so quite often. And every recession of the past 50 years has been heralded 12 to 18 months in advance by a reversal in bond yields.
What is special this time is that the inversion is more pronounced than it has been since the dot-com bubble burst 22 years ago. At that time, the yield curve had turned negative in early 2000, and in March 2001 the US economy slipped into a deep recession.
The stock markets crashed before that. Their downtrend started shortly after the bond market announced a recession.
“At that time, the first slide in the US technology index Nasdaq 100 by around 32 percent was followed by another slide of 75 percent before a resilient bottom was found in October 2002,” says Jochen Stanzl, chief market analyst at broker CMC Markets. “The current recovery in share prices is therefore deceptive if at the same time the fundamental substructure of the market is threatening to collapse.”
But what actually leads to the negative yield curve? “This phenomenon occurs when the market suspects that the Federal Reserve is about to cut interest rates,” said Jack Colreavy, an analyst at Barclays. This forecast, in turn, is based on investors’ assumptions that a recession is imminent, and central banks generally react to this by lowering interest rates in order to stimulate the economy again.
However, if interest rates go down in the future, then it makes sense to quickly buy long-dated bonds at current yields before they go down later. The rush to buy these bonds, in turn, causes their prices to rise and their yields to fall, below the yields on short-dated bonds: the yield curve turns negative.
Specifically, the financial market is currently assuming that the Fed will raise the key interest rate by the end of the year, to a level of 3.5 to 3.75 percent. In the coming year, however, it is expected to lower interest rates again, on the one hand because inflation will then fall significantly, on the other hand because the economy will fall into recession as a result of the high interest rates.
While most economists agree that the US economy is slipping into recession, they often see the outlook for inflation differently.
“Extremely high and persistent inflation continues to weigh on the global economy and until it is brought under control central bankers will have no choice but to continue raising interest rates and keeping them high,” says Jack Colreavy. “Therefore, I assume that history of the late 70’s/80’s will repeat itself and the yield curve will remain inverted for some time.”
At the end of 1979, the then Fed chief Paul Volcker ended a decade of high inflation rates with a radical cure by drastically raising interest rates to over 20 percent, regardless of economic developments. The US economy went into a deep recession, but Volcker did not cut interest rates until inflation fell significantly in late 1982.
It was a radical cure, but apparently there was no other way of controlling inflation without accepting a deep economic crisis. So is the mega recession coming this time?
On the one hand, inflation rates, particularly in the USA, are already at a level similar to that of the late 1970s. On the other hand, the upsurge in prices has not yet become as entrenched as it was then. Maybe then the measures don’t have to be quite so brutal.
The decisive factor will be how the inflation rates develop in the coming months. The latest figures hint at a bit of hope: The inflation rate for goods and services fell to 8.5 percent in July from 9.1 percent in June, the Labor Department said in Washington on Wednesday. Experts surveyed by the Reuters news agency had expected 8.7 percent.
However, the experts remain skeptical: “Price inflation weakened more significantly in July, mainly because petrol was cheaper to buy. But that is not yet an all-clear signal. The US Federal Reserve will not like the fact that the core inflation rate has not fallen further,” explains Bastian Hepperle from the private bank Hauck Aufhäuser Lampe.
“Everything on shares” is the daily stock exchange shot from the WELT business editorial team. Every morning from 7 a.m. with the financial journalists from WELT. For stock market experts and beginners. Subscribe to the podcast on Spotify, Apple Podcast, Amazon Music and Deezer. Or directly via RSS feed.