The US economy is in the last phase of the economic cycle that has powered markets for nearly nine years. Investors could previously look to bond market activity to gauge whether a recession was looming but it’s possible that the Federal Reserve has rendered this indicator obsolete.

Typically, investors would expect to receive a greater return on bonds with a longer lifespan than on those with a shorter one. Every US recession that has occurred since 1960 has been preceded by a reversal of this situation, which is why it has previously been considered a reasonable means of anticipating an economic slowdown.

However, it is not clear whether this remains the case, in light of the Federal Reserve’s programme of bond buying or quantitative easing (QE). This has led to the Federal Reserve becoming a huge holder of US government bonds and, consequently, it is having a big influence on the market. 

Careful analysis of the bond market can determine the extent to which this indictor remains effective. The results can then be used to establish whether it should be considered in isolation or whether other indicators may also required in order to refine its predictive power.

Investors are undoubtedly curious as to what the future holds for the world’s largest economy. While there is no such thing as a crystal ball, certain economic indicators have previously heralded the arrival of a recession, on a historical basis. The extent to which this remains true, following unprecedented central bank activity, requires closer analysis.  

For professional investor use only.
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
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