"It is impossible to be 100 percent sure about the future but I'd say the chances of a recession in the second half next year are pretty high," said Estrella, who first discovered the predictive power of the yield curve.
Recession could hit sooner than you think – This is what Arturo Estrella, the renowned economist, feels.
"It is impossible to be 100 percent sure about the future but I'd say the chances of a recession in the second half next year are pretty high," Estrella, who first discovered the predictive power of the yield curve, told CNBC.
On August 22, the spread between the yield on the 10-year Treasury note and that of the 2-year note turned negative for the third time in less than two weeks since August 14, pointed out the report. In rare situations like this one, the interest rates have adjusted to a point where longer redemption time-frame is bringing lesser interests.
The yield curve is represented by the curve that tracks the difference between short-term and long-term interest rates of US treasury notes or government bonds. Therefore, yield curve plots bonds for different maturities like one year or ten years. As a norm, long-term interest rate bonds usually carry higher interest rates compared to short-term bonds. The bonds also have an inverse relationship between price and the yields.
It has been pointed out that the yield curve has historically been one of the best indicators of approaching recession. According to Estrella, it has indicated seven recessions in 50 years quite accurately.
Credit Suisse found that it takes almost 2 years on average for a yield inversion to hit a recession.
But some experts feel that it might not mean panic yet. A report by the New York Times cites economists who feel the yield curve means less than it used to. Since the US federal bank has been raising interest on short-term bonds, there is downward pressure on long term interests.
Meanwhile, rising geopolitical uncertainties with a slowdown in the manufacturing and auto sectors globally has kept people worried.