skip to log on skip to main content

The curve that tells us when recession will hit


28 June 2018








When bond markets don’t return more to long-term investors, we need to pay attention, says ANZ's chief investment office.

Investors usually expect better returns from long-term bonds than short ones – it’s when that difference disappears that we’re most likely heading to recession.

The difference in returns between long and short-term bonds or debt securities is known as the yield curve. When economies are healthy that curve is upward and long-term bonds deliver greater returns.

When that curve flattens or actually inverts (meaning investors get more from short-term bonds) then we’re heading for trouble.

The yield curve is seen by many to be the most reliable predictor of the economic outlook. When we look at US economic downturns over the past 40 years, every time the yield curve has inverted the economy has ultimately gone into recession.

But it’s more than just whether the yield curve is inverted. The yield curve’s accuracy is quite amazing: the degree of steepness of the curve correlates (with a lead of around 18 months) with the pace of growth so a flatter curve indicates slower growth and a steeper curve means a faster pace. Not surprisingly it also closely correlates with earnings on the US sharemarket.


Data source: YCharts/Federal Reserve (June 22, 2009 to June 22, 2018)


How we respond to inflation will make all the difference

Given the flattening of the yield curve recently, there’s increasing concern over central banks’ moves to cut economic support measures, which investors fear will cause further flattening of the curve meaning we’ll have recession sooner.

But it appears the US central bank is set to continue to increase interest rates, having indicated it is likely to do so several more times this year.

The US Federal Reserve cut the federal funds rate to nearly 0 per cent to stimulate the nation’s economy out of the global financial crisis. It didn’t start increasing rates until about eight years after, with the first one coming in 2015, and five more after that. The Fed is bringing interest rates back to normal to try and stop inflation rising too quickly. It is particularly concerned that low unemployment in the US will starting pushing up wages, giving people more money, so they spend more, and prices, hence inflation, rise.

Should the US Fed increase interest rates?

The yield curve is already suggesting the US economy will slow to around a 1.5 per cent pace by mid next year, and along with it earnings growth will stall.

It’s worth asking the question ’Does the Fed really have to raise short-term rates much more?’. This should be expected only if inflation looks likely to be well clear of 2 per cent (the Fed’s target), and therefore sees a need to slow the economy significantly. There’s no need to do it otherwise. (Recent US company tax cuts complicate things by providing a boost to the economy.)

What’s happening in the economy and markets now is consistent with ANZ Chief Investment Office’s prediction for 2018 that the ‘good times would fade’ as the investment cycle gradually comes to an end.

Right now, indicators – from the yield curve to ANZ’s investment cycle clock – point to a sharemarket peak in mid-2019. But we still need more flattening and inversion of the curve before a significant downturn is flagged. And Fed rate rises may make that happen.


Mark Rider, former Chief Investment Officer

Mark brought over 30 years of investment market experience to ANZ, having previously worked at UBS and the Reserve Bank of Australia. During his seven-year tenure at ANZ Mark was responsible for and contributed to the overarching investment philosophy, investment strategy and asset allocation of ANZ Private Banking.


To discuss what this insight could mean for you, talk to your ANZ Private banker directly, or contact us below.

We turn your wealth into a life-enriching asset

Contact us

You might also like

Gradual or sharp slowdown? Inflation will decide

18 June 2018


Split, fixed or variable? How you manage interest rates depends on the assets you invest in.

Read more

Weaker sharemarket returns signal what's ahead

17 May 2018


More subdued sharemarket returns this year are broadly in line with our expectation that good times would fade.

Read more

ANZ Global Market Outlook 2018

January 2018


In this, our annual look at the global market, investors take note: the double-digit sharemarket returns of 2017 will moderate this year, explains ANZ's chief investment office.

Read more

Contact us

How to Become an ANZ Private Client

To find out more about how to become a Private Client, share your details here.

Request a call back

Email ANZ Private

Email us with your query and we'll reply to you directly.

Send an email

Call us

Speak to the ANZ Private team directly

1800 316 926

We're available weekdays 9:00am to 6:00pm AEST

Find an ANZ Private office

Our locations across Australia

Find an office

ANZ Private Bankers are representatives of Australia and New Zealand Banking Group Limited ABN 11 005 357 522 (ANZ), the holder of Australian Financial Services Licence number 234527. This document ("document") is distributed to you by ANZ and may not be reproduced, distributed or published by any recipient for any purpose.

The information provided is general in nature only and does not take into account your personal objectives, financial situation or needs. Please consider its appropriateness to you before making any investment decisions. It should not be relied upon as a substitute for professional advice. For any product referred to above, ANZ recommends that you read any relevant offer document or product disclosure statement and consider if the product is appropriate for you. For products issued by ANZ, these documents are available at This document is current as at the date of this publication but is subject to change. The document is provided and issued by ANZ unless another author is specified in the document, in which case it is provided and issued by that author. The views expressed are those of the authors only and do not necessarily reflect the opinions or views of ANZ, its employees or directors. Whilst care has been taken in preparing this document, ANZ and its related entities do not warrant or represent that the document is accurate or complete. To the extent permitted by law, ANZ and its related entities do not accept any responsibility or liability from the use of the information. Past performance is not indicative of future performance and any case study shown is for illustrative purposes only. Neither are a prediction of the actual outcome which will be achieved. Some of this information may have tax implications. We recommend that you seek specialist tax advice on how it may impact your tax obligations, liabilities or entitlements.