Searches on Google for “inverted yield curve” have spiked after the unusual bond market phenomenon presented itself last week for the first time in over 12 years and helped tank Wall Street amid chatter that an economic downturn was imminent.
Following a tweet from U.S. President Donald Trump referencing the “CRAZY INVERTED YIELD CURVE!”, the term made its way onto news websites and radio and television reports that rarely delve into financial topics. Even late-night TV star Stephen Colbert devoted a portion of his show trying to decipher what it means when the yield on 10-year U.S. Treasury notes falls below those for 2-year notes.
As it happens, that abnormal bond market dynamic often precedes U.S. recessions, and when it appeared last Wednesday for the first time since 2007, it rattled investors worried that a U.S.-China trade war might kill both a record-long economic expansion and a decade-long bull market for stocks.
U.S. web searches for “inverted yield curve” are on track in August for their highest month on record, and more than double the next highest month December 2005, according to Google’s Google Trends analysis tool https://trends.google.com/trends/explore?date=all&geo=US&q=inverted%20yield%20curve. December 2005 was the last time 2-year and 10-year Treasury notes entered an inversion trend, one that would continue through 2007 and be followed by the global financial crisis and the harshest recession since the Great Depression.
Bond yields are a main measure of the return the securities deliver to investors, and they are also a proxy for interest rates.
When the yields on bonds of different maturities are plotted on a graph, it produces a curve that typically has an upward slope because investors expect greater compensation for the risk of owning longer-maturity debt. An inversion, when shorter-dated yields are higher than longer-dated ones, implies that investors see greater risks in the near future.
Google Trends provides data on the frequency of searches during a time period relative to other time periods. It does not provide actual numbers of web searches.
After Google searches for “inverted yield curve” spiked in 2005, searches for the term entered a lull for over a decade until December 2018. That is when yields on 5-year notes dropped below yields on 2-year notes, setting off talk of a potential recession and questions about whether the more closely watched 10-year yield would invert, as it eventually did last week.
The U.S. yield curve has been slowly flattening since 2013 or earlier, and while economists and central bank policy makers have hotly debated its significance, the trend has mostly gone unnoticed by the public.
The spread between U.S. 2-year and 10-year note yields has slipped below zero before each of the last five U.S. recessions, although it has taken anywhere from 12 to 24 months for the recession to occur. The curve’s inversion often ended before a recession began, and the inversions did not predict the length or severity of an economic downturn.
The U.S. yield curve has returned to its normal since last Wednesday’s inversion, with benchmark 10-year notes on Monday yielding 1.611%, about 0.05 percentage points more than equivalent 2-year notes.
Economists and investors are watching to see if the yield curve again reverts and enters an inverted trend, which would increase concerns across Wall Street and put more pressure on the Federal Reserve to cut interest rates to bolster the economy.