relied on one bond market indicator

to gauge whether or not a US recession is close.

That indicator is the US yield curve.

00:00:19,530 --> 00:00:21,870 Now typically, short term interest rates

are lower than long term interest rates

because investors demand a bit more compensation

to lend on a longer term basis.

This is what a typical US yield curve looks like.

00:00:34,140 --> 00:00:38,700 Now when this relationship reverses and short-term yields

rise higher than long-term yields

people often take this as an indication

that monetary policy is just too tight

and economic slowdown could be coming

and that the Fed is going to have

to lower interest rates in order to protect the economy.

What that leads is for long-term rates

to come down below that of short-term rates.

And that leads the US yield curve to invert or turn

negative, and it looks like this.

00:01:05,530 --> 00:01:08,580 Now people pay attention to when the US yield curve inverts

because it has turned negative before every US

recession of the last 50 years.

Now the whole US yield curve wasn't

negative over the summer.

Only portions of it were.

Now one portion of that is the difference

between three-month Treasury yields and 10-year Treasury

yields, and that turned negative, substantially so,

at the end of July and throughout August.

00:01:35,245 --> 00:01:36,620 Now as you can see in this chart,

this time last year this difference

between three month and 10-year yields

was as high as 88 basis points.

But as the year went on the curve

continued to flatten somewhat.

And in March, for the first time since

the global financial crisis about a decade

ago, this portion of the curve turned negative.

Now it quickly moved above zero again as the summer continued.

It wasn't until July that it turned deeply negative

and moved even more so throughout August.

At one point in August it was at minus 51 basis points.

And that's a sizeable move compared to where we

were just this time last year.

Now a few things drove this, for one

an escalation of the trade war between the US and China.

Now the Federal Reserve did slash interest rates

for the first time since the global financial crisis

in July.

They moved again in September.

And they're expected to move once again in October.

Now that has helped steepen the curve.

As you can see in the chart, it's now above zero.

But it's still flat at just 10 basis points.

A few things drove this.

There were some positive developments on the trade war

front between the US and China.

They had reached a preliminary deal,

which helped to alleviate a lot of the uncertainties that

had been weighing on the global economy.

Brexit negotiations were continuing apace,

and there's been some progress on that front.

And at the same time, you had the Federal Reserve

coming in and announcing that it would buy

$60bn worth of Treasury bills.

What that has done is to help pull down short-term Treasury

yields at the same time that the global growth outlook is

brightening a bit, which has helped to lift

longer term Treasury yields.

Now there's a lot of concerns that this recent steepening

that we've seen is going to be short-lived.

A lot of the things that drove the steepening,

such as the trade war and Brexit,

those things are not a done deal just yet.

So there's a big, big concern that this recent steepening

isn't going to last very long.