What’s Up (or down) with the Yield Curve?
If you follow the financial headlines even a little bit, it would be hard to miss all of the recent attention focused on the yield curve. Why? Mainly because an inversion in parts of the yield curve have been predictors of the last 5 recessions.
What is the yield curve anyway? The yield curve is actually just a simple graph showing interest rates on different types (terms) of US government bonds. A “normal” yield curve has shorter term bonds paying lower interest rates than longer term bonds; much like bank CDs, you get a higher interest rate the longer you agree to leave the money in the bank. In this case, a buyer of a US government bond is lending his or her money to the government for a set period of time in exchange for interest.
An inverted yield curve has some short-term rates higher than some long-term rates. The most recent headlines are specifically referencing the difference between the 2-year US treasury bond rate and the 10-year US treasury bond rate, which has been the “recession indicator” in the past. The 2-year rate went very slightly above the 10-year rate for a short time on 8/14, but as of this post the 10-year rate is 1.60% and the 2-year rate is 1.53%.
As always, this is just one indicator/data set in a sea of other indicators. Jobless claims are still at their lowest point since the 1970s and consumer confidence remains very high. So, there are still some positives for the US economy in particular.
Further, if the inversion of the yield curve is an accurate predictor for a 6th time, there has been an average of 22 months between inversion and an actual recession. In fact, the US stock market has usually gone up further during that period. So, while recessionary fears are growing, it is not time to bail out of any long-term investments at this point in time.
The personal/market tie-in this week has to be comparing riding the Viking ship at Knoebels in Pennsylvania to the market charts so far this quarter; up and down and up and down…here’s my son Coleman during one of the ups! Hopefully, this is what all of our faces will look like when it comes time to open our investment account statements!