What if the next recession could be accurately predicted? Thousands of market professionals, including economists, fund managers and traders, are still looking for tools to help them gauge the likelihood of an impending economic crisis. That tool is called the US yield curve.
What is the US yield curve?
The US yield represents a collection of government bonds with maturities issued by the US government. The yield curve is simply a curve that plots bond yields on a chart against the latest Fed rates at one end and 30-year Treasuries at the other.
The ‘curve’ with an upward slope is drawn from left to right. At the lower end of the slope are short-term Treasuries, which represent low yields. At the higher end are longer-term Treasuries, which have higher yields because they compensate investors for exposure to risks, like inflation, over a longer time frame. As such, the ‘normal curve’ will tend to rise if yields rise.
The yield differential on near- or long-term bonds reflects investors’ views of the U.S. economy. The normal curve gives an indication of a healthy financial market because investors are willing to trust their Bonds over a longer time frame.
But the bells of change ring when those curves cross. That is, the short-term-long-term yield differential is shrinking and investors are now expecting to limit inflation and economic growth further, which is the way it is at the moment. Moreover, the Fed’s decision to raise rates last year also had significant effects, helping to boost short-term yields and drive longer-term yields down.
It’s a sign of a steep inversion, which from a bond investor’s perspective is a sign of a slowdown. That is, the Fed will cut interest rates (as they did) and inflation will fall (it is happening).
This week, the slope reversed for the first time since 2007.
US Recession Prediction and Bitcoin Evangelism
A benchmark index showing the spread in 2-year and 10-year Treasury yields is now inverting. Prior to that, the spread exceeded 290 basis points due to the Fed’s widening policy crisis in 2008. Now history is repeating itself, yields signaling the possibility of a recession in the US. It has been able to predict many recessions since the second world war and only not once in the 1960s. So the probability of accuracy is higher.
That gives Bitcoin evangelists plenty of opportunities to propagate the cryptocurrency as a ‘savior’ asset. Gabor Gurbacs, director of digital asset strategy at VanEck, has called Bitcoin a “Plan B” against negative-yielding government bonds.
According to Deutsche Bank, 27% of bonds in the world trade at a negative interest rate with a total market value of ~$15 trillion or 75x #bitcoin‘s market cap. It’s time for Plan ₿! pic.twitter.com/KrZbR4ocxl
— Gabor Gurbacs (@gaborgurbacs) August 14, 2019
“According to Deutsche Bank, 27% of the world’s trading bonds have a negative yield with a total market value of ~$15 trillion or 75 times the market cap of #Bitcoin. Time to start planning!”
As a non-sovereign asset, Bitcoin’s fixed supply will be exhausted upon issuance of a total of 21 million units. It allows individual investors to treat digital currency as “digital gold” – and compete with real gold – because it is easier to transfer and move than the yellow metal.
There is no concrete evidence that mainstream investors are anti-Bitcoin amid the current recession fears. But Morgan Creek’s head of Digital Assets Anthony Pompliano hopes they will. He said on Wednesday:
The spread on the 2 year / 10 year US bonds just inverted for the first time since 2007.
Really hope we aren’t headed towards a recession, but every day that is looking more likely…
— Pomp (@APompliano) August 14, 2019
“Bitcoin price could drop 50% from today’s price of $10,600 and the digital currency will still outperform the S&P 500 in 2019.”
Two-year/10-year U.S. bonds have reversed for the first time since 2007.
Really hope there won’t be a recession, but with each passing day it seems…”
Bitcoin Magazine | Newsbtc
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