One of the most reliable barometers for economic health is sounding alarms, signifying that the U.S. could be headed for a recession. The Yield Curve—which measures the spread on U.S. Treasury obligations— inverted on Friday, meaning that ten-year bonds now pay lower interest than the three-month note.
The inversion made the front page of the Wall Street Journal and sent stocks plummeting. The Dow Jones Industrial Average fell by 1.8 per cent and the S&P 500 by 1.9 per cent.
Why did Bond Yields Flip?
In typical economic situations, investors expect higher returns from longer-term bonds, reflecting the opportunity costs of tying up their wealth for a full decade. But when outlook is pessimistic, investors accept lower returns in exchange for the added security of the long-term note.
Inversions in the yield curve are considered one of the most reliable canaries for economic contractions, ever since they were first identified in 1986. Every recession since the 1970s has been preceded by an inverted yield curve, and to date, there have been no false signals.
Campbell Harvey, who first proposed the Yield Curve model in his PhD dissertation, is not quite ready to panic, but he is getting nervous. “My model argues that a yield curve inversion must be realized for a full quarter—not merely a few days,” he wrote in an article for Barron’s. “So we are not quite there—but the trend suggests we will soon be there.”
But even a flattened yield curve —such as the one which has existed for the past several months—could signify diminished economic prospects. On Wednesday the Federal Reserve cut back its forecast for economic growth, to just over two per cent for the year, and the Open Market Committee indicated that it would not raise interest rates.
How will cryptocurrencies weather the next storm?
Although Bitcoin owes its genesis to the financial crisis of 2008, cryptocurrencies have yet to be fully tested in a recession.
A common story among crypto enthusiasts is that Bitcoin might serve as a safe haven in periods of economic calamity. Cryptocurrencies often mirror the price movements of precious metals, as Crypto Briefing has previously reported.
But experts are divided on the extent to which a virtual currency might actually serve as an anti-recession hedge. In a typical recession, most investors become more risk-averse—which might be bad news for crypto market caps.
On the other hand, if a recession were compounded by poor policies—such as a Cyprus-like bail-in, an inflation crisis, or the financial judgements which led to the last recession— that could serve as a reminder to the wider market that cryptocurrencies are stateless and uninflatable.
Whether these qualities will actually help a crypto-portfolio survive a recession is not yet clear. It will be soon enough. As Harvey mentions in his article, “The average time to recession in the modern era is 58 months and we are now at 117 months, or more than double the average. The time is right.”
The author is invested in Bitcoin, which is mentioned in this article.