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Flash of recession signal not seen in 12 years

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Flash of recession signal not seen in 12 years

Flash of recession signal not seen in 12 years

The U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007, in a sign of investor concern that the world's biggest economy could be heading for recession.

Zachary Goelman reports.


Flash of recession signal not seen in 12 years

The sound of the opening bell on Wall Street Wednesday over shadowed by a virtual warning siren that the U.S. economy could be headed for a recession.

The fears of a downturn spiked after a closely-watched indicator called the yield curve flipped into what investors call an inversion.

Dan Burns is the U.S. markets editor for Reuters.

(SOUNDBITE) (English) U.S. MARKETS EDITOR DAN BURNS, SAYING: "So the last time we went from being not inverted to inverted was in late 2005, and of course that ended up being two years before a full-on recession and financial crisis.

At the time, as happens now, there was a corner of policy makers and others who say 'oh, it's different this time, the yield curve will invert from time to time and not be a recession signal.'

The fact is, nine of the last ten recessions have been predicted by a yield curve inversion." What is the yield curve?

It measures the yields on U.S. Treasury bonds.

On the bottom, you see the different Treasury bonds: from the shortest at one month, all the way out to the thirty-year.

And normally, the longer the term on the bond, the higher the yield.

This is what's thought of as a normal yield curve, with a gentle, upward slope.

But when investors start thinking that the long-term outlook isn't so good, the curve can start to look, well, like this.

That dip, with the short-term bonds above the long-term is called an inversion.

Another way of looking at it is to measure the difference in yield between the two-year and the ten-year Treasury bonds.

Investors call that difference a spread.

When the 10-year yield is below the 2-year yield, the spread is negative.

And negative spreads seem to precede recessions.

This shows the spread going back to the 1980s.

Here are the spots in the last 20 years when that spread has dipped negative.

And here are the periods where the U.S. economy went into recession.

So when the yield curve on Wednesday inverted, and the spread went negative, a lot of people said, "uh-oh." That doesn't mean a recession is imminent, or even certain.

(SOUNDBITE) (English) U.S. MARKETS EDITOR DAN BURNS, SAYING: "In the 'what's different this time' camp, there are some things that are genuinely different.

The U.S. employment market remains quite strong.

Consumer spending remains really robust.

And that accounts for 70 percent of all U.S. economic activity.

Now, in the worriying camp, we have seen slowdowns in business spending an investment." The economic picture might be murky.

But the first yield curve inversion in 12 years may signal that Wall Street's decade-long rise is near an end.

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