Are 'perverted yield curves' pointing to a slowdown?

There has been a nearly unprecedented development recently: negative interest rates in Switzerland at both the short and the long end of the curve.

I was chatting with Bob Walters, who oversees the capital markets business for Quicken Loans, recently and I asked him what you would call an inverted yield curve comprised solely of negative interest rates.

"A perverted yield curve!" he replied.

Swiss government benchmark yield curve

We are seeing "perverted yield curves" almost everywhere you look, though not to the same extent as in Switzerland.

Yield curves, which measure the spread between short- and long-term interest rates in a particular country, are typically positive, or upwardly sloping, during an economic expansion. They flatten during a slowdown, and invert before a recession, meaning that long-term rates are lower than short-term rates. That, historically, occurs when a central bank is raising short-term rates to cool an overheating economy. As short rates go up, investors buy longer-dated maturities whose prices will go up, and yields will fall, as higher short rates induce an inflation-killing recession.

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In my experience, a flat, or inverted, yield curve is almost — and I stress almost — a sure sign that a slowdown, or recession, is on the horizon 6-to-9 months down the road, if not sooner.

Yield curves around the world have flattened considerably and, as I have suggested, inverted in a handful of countries. But rather than occurring as a result of central bank tightening, they are occurring as central banks lower short-term interest rates — a curious development, indeed.

These perverted yield curves are still indicative of slowdown, or recession, but they are being caused by deflation, rather than inflation. And thus a new bond market conundrum is born.

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We are not, by any means, in a typical business cycle anywhere in the world. In Denmark, for instance, MORTGAGE RATES are approaching zero! A home buyer is being paid to buy a home!

As Hamlet once said, "'tis a consummation devoutly to be wished!"

No matter where you look — in China, Japan, Europe, Latin America and, quite possibly the U.S., a slowdown appears imminent. The U.S. economy, growing more rapidly than the rest of the world, has already been affected by the overseas recession. Fourth-quarter growth was a full percentage point weaker, thanks to weakening exports. The U.S. is still growing and does not appear in danger of falling into recession. But clearly, the Federal Reserve, by its own admission, will watch the rest of the world to assess how much of an adverse impact it's having on the U.S.

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If we see more "perverted yield curves" elsewhere in the world, expect the Fed to divert from its planned course of action and defer any rate hikes until the perversion passes.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also editor of "Insana's Market Intellgence," available at He delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at Follow him on Twitter @rinsana.

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