How Can Bond Yields Predict an Economic Downturn?
Some economists are starting to worry about the future of the economy, pointing to a “flattening” of the yield curve, or term spread as it’s also referred to, of the bond market.
The bond market is looked at as an indicator of economic health because of how government bonds are typically in sync with interest rates and the economy at large. While not discussed as routinely as the stock market (the bond market is decidedly less sexy than the stock market), it’s about twice the size of the stock market with far more trading activity. Because bonds generally follow economic activity, they can be predictive of the stock market. And the stock market is a lagging indicator of the economy; once stocks start falling, it’s too late, just as we saw with the 2007/2008 recession. Keep Reading
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