The Yield Curve Inverted Again

Water coolers are stacked and ready to be broken down into parts for recycling at a GDB International warehouse in Monmouth Junction N.J

Water coolers are stacked and ready to be broken down into parts for recycling at a GDB International warehouse in Monmouth Junction N.J

The Dow Jones fell 3.05% after the yield curve inversion saw the two-year yield rise above 1.628% and the 10-year yield go below 1.619% on August 14, the signal that's predicted every recession. Yields inverted nearly exactly a week ago and investors have grown increasingly anxious about the gauge, which has preceded the past seven recessions.

The market appeared to take Wednesday's inversion in stride. That rarely occurs. Before this month, that section of the yield curve hadn't inverted since 2007, just before the Great Recession. "The yield curve has been flirting in and out of inversion, so that's not new either", explained Michael Antonelli, managing director at Baird. On top of that, the inversion needs to be deeper than a few basis points to represent a significant recession indicator.

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That's because inversions of certain parts of the yield curve have often been predictors of American recessions. But the inversion that predicts a recession is when the 10-year yield drops below the two-year yield, which is exactly what happened on August 14 and again on August 21.

More recently, however, many market watchers have begun to doubt its predictive ability. Meanwhile, the Dow Jones Industrial Average finished Wednesday's trade up 240 points, or 0.9%, at 26,202, the S&P 500 index advanced 0.8% at 2,924, while the Nasdaq Composite Index closed 0.9% higher at 8,020.

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