Mitigate risk, even out inequalities as yield curve signals downturn

THE persistence of the inverted US Treasury yield curve is as good a signal as any for policymakers to start raising the levees in case the next storm hits.

It is anyone's guess what the catalyst for the next recession may be. But while the spark may not have been sighted yet, we already have visibility on where the pricing bubbles are hovering, and on the socioeconomic inequalities that could make the impact of a downturn and the path to recovery worse. Policymakers should target those known risks with haste.

The inversion of the US Treasury yield curve hit yet another milestone in July, with 10-year yields remaining below three-month yields for a full month. In a normal, growing economy, investors should demand greater compensation for lending out money over a longer period, so longer-term yields should be higher than shorter-term rates. When investors are willing to take a lower yield over the longer term, the implication is that they are not confident about the economy growing enough to justify higher long-term rates.