Recently, we saw for the first time since 2008 an inversion of the yield cure for long term bonds. A yield curve inversion is when the returns for a long-term bond like the 10 year treasury bond see lower rates than another shorter bond like the 3 month bond or the 1 year bonds. Typically, longer term bonds have higher rates of return than shorter bonds because longer term bonds carry a higher risk and thus to attract investors- the rates must be high enough that investors will be willing to take that risk. However, when there is an inversion that may mean that investors are getting anxious.
Bond yields fall
as prices of bonds increase and bond prices change following the laws of supply
and demand. Ultimately, investors are wanting a secure place to put their money
and thus buy up longer term bonds even though the rate of return will be much
lower than usual. When this notion becomes widespread it causes the yield curve
to invert making the returns on the safer short-term bonds higher than longer
In a nutshell, this may have a negative impact on the economy as it relates to the markets. In lay man’s terms: The yield curve inversion is one of the most prominent indicators that a recession may be looming. We have seen recessions preceded by a yield curve in the last 2 cycle of recessions. The first cycle recession happened back in 2000 and then 2008. When the inversion appeared in recent market analysis, the DOW plunged losing value as investors became worried (skiddish) about the future. It is important to note that recessions
Following yield curve inversion do not happen right away, the past recessions that have occurred have all begun on average around 15 months after the inversion occurred. While a recession is not here today, we may have been put on notice that the good times are not to last. Which is bad news for most investors. But not to worry, if your portfolio is diverse, you more than likely will survive. If you are an average middle class person/family- you may want to start preparing for the outcome.
All the best~