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The inverted yield curve will cause asset bubbles not recession, economist says

The inverted yield curve will cause asset bubbles not recession, economist says




A yield curve inversion, which occurred last week, often signals a recession is coming in the medium-term.




Last week's yield curve inversion is different argues RBC Chief US economist Tom Porcelli.




He says asset bubbles are the real risk as US economy continues to outperform the rest of the world.




The inversion of the yield curve, where short-term Treasury yields exceed those of longer-term notes, has many market commentators claiming that a recession is near. Last Friday, the yield on 3-month bills exceeded that of the 10-year note for the first time since 2007. The S&P was off nearly 2% on the day, its worst performance since January 3.
The yield curve typically slopes upwards as longer-dated Treasury bonds typically have higher yields than shorter term bonds. A flat curve means all bonds have the same interest rate and an inverted curve means that the curve slopes downward at some points, with longer-dated bonds at lower yields than shorter dated ones.
Usually, investors receive a higher interest rate for the longer they commit funds - when the opposite happens, as it does during a yield-curve inversion, many people take this to be a strong signal that markets are flashing a warning sign.
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