The yield curve compares the interest rates paid on Treasury securities based on when they mature. The shortest maturity is 3 months and the longest is 30 years. In normal times, the yield curve is positively sloped, meaning you earn more from long term interest rates than you do from short term interest rates. That’s because investors expect to earn a higher rate for lending out their money over a longer period of time. But lately the yield curve has become inverted, meaning that short term rates are higher than long term rates. For example, 10 year Treasuries now yield about 1.5 percent and 2 year Treasuries yield 1.6 percent.
1. The Feds have raised short term interest rates 9 times since the end of 2015.
3. Worried investors from around the world have been piling their money into long term US Treasuries as a safety haven. Bonds are traditionally considered to be the most conservative and lowest risk investments, regardless of what the stock market or the economy does. Increased demand for bonds pushes up their price, lowering their yields.
Hang in there for a minute because you really need to understand the implications an inverted yield curve may have for you.
Many economists see an inverted yield curve as a sign that the US economy is going to fall into a recession. Every recession for the past few decades has been preceded by an inverted yield curve – but – every inverted yield curve has not been followed by a recession. It’s an indicator but not a guarantee, an important difference to remember.
It usually takes twelve to fourteen months for a recession to kick in once the curve has inverted and it just inverted recently. If consumers and businesses think a recession is coming, they tend to pull back on their discretionary spending, which can bring on an economic slowdown.
Keep your eye on whether the yield curve stays inverted, because it is often seen as the “canary in the coal mine” of a coming recession. And be sure to watch the partner video to this one to get a better understanding of negative interest rates.
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