The yield curve is flattening!

The yield curve is flattening! Inverting soon. Recession coming!

The yield curve is one of the most trusted leading indicators of an economic slowdown. Lately, much has been made of the US yield curve flattening. The yield curve is a plotting of Government bonds (or treasury bills)’s interest rates of various maturies. A normal yield curve is upward sloping. Investors need higher premium to compensate for longer term uncertainties and because of the expectation that the economy will expand in the future. The reverse is hence true when the longer term rates are lower than the shorter term ones (i.e. expectation of recession), causing the yield curve to invert.

There are analysts considering pressing the panic button while there are others who are saying Hold your horses. The Malaysian yield curve is still upward sloping. But the far reaching US economy has an impact on the world economy, including Malaysia’s.

As the new Malaysian Government works to rein in the national debt, it has no choice but to scale back or cancel big ticket projects. Overall consumption will decrease. Hence some form of contraction to the economy is inevitable. How much is the question now.