What is a yield curve inversion? | Why did the yield curve invert? | Will there be a recession?
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In today’s video I am going to talk about the inverted yield curve and what a yield curve inversion means and more specifically, what does all of this mean for the US economy and the global economy and does this mean we are in for a 2022 recession. We’ll talk about government bonds, the federal reserve, supply and demand, yield, investment and basic economics explained. Many people are worried about a global recession and a stock market crash that could lead to a financial crisis, but I have some money tips on investing during times of soaring US inflation and high interest rates that might be able to help you weather the storm if there is a recession coming. Even though right now we are experiencing a high inflation rate and high interest rates does that actually mean a recession coming. Hopefully this video will help you better understand the inverted yield curve and if we are in store for an economic recession 2022.
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Today I am going to talk about the inverted yield curve. If you have been following the financial news lately, then you probably have been hearing a lot about the inverted yield curve. You may be wondering what exactly is an inverted yield curve, why is it gaining so much attention, and more importantly how does it impact your life and investments. In today’s video, we are going to talk about why this is so important and why it can indicate that a recession is on the way. I will also talk about some things that you can do to remain financially healthy in the event of a recession. So let’s jump right in.
What exactly is the yield curve? When we talk about the yield curve we are referring to the relationship between the short-term and long-term interest rates on fixed-income securities, usually in the form of bonds issued by the U.S. Treasury. An inverted yield curve happens when short-term interest rates are higher than long-term interest rates. Most of the time during normal economic cycles, the yield curve is not inverted since debt with longer maturities typically pay higher interest rates than nearer-term ones. When we are talking about short term interest rates and long term interest rates, we are talking about the 2 year and 10 year yields respectively. At the time of this video the yield on the benchmark 10-year Treasury note climbed to 2.963% while the yield on the yield on the 2-year sits at 3.164% making an inversion of the yield curve. This is significant because an inverted yield curve is rather uncommon. It indicates that the near-term is riskier than the long term. Usually, in normal economic cycles the short-term interest rates are lower than long-term interest rates, which causes the yield curve to slope upwards, indicating higher yields for longer-term investments. Meaning the longer you loan your money to the US government the more interest you will receive. Therefore, you would expect to receive more interest on a 10-year loan vs. a 2-year loan. This is commonly considered to be a normal yield curve. When the spread between short-term and long-term interest rates begins to narrow, it causes the yield curve to flatten. Typically, a flat yield curve is usually observed during the transition period from a normal yield curve to an inverted yield curve. So why is this important and what does it mean for investors and the overall economy? Historically, an inverted yield curve has been seen by economists and investors that an economic recession is coming. As investors become concerned about an approaching recession, many investors will buy long term Treasury bonds based on the premise that they offer safety from a declining stock market. This helps investors protect their capital, and hopefully have an opportunity for some appreciation in value as interest rates decline. As a result of the rotation to long term bonds, yields can fall below short-term rates, forming an inverted yield curve. Meaning you would be getting more money for loaning to the government in the short term than he long term. When the short-term interest rates rise above long-term rates, the general feeling in the market indicates that the long-term economic outlook is poor and that the yields for long-term bonds will continue to fall. The Inversion of the yield curve has been a somewhat rare phenomenon, due largely to longer than normal cycles between recessions since the early 1990s.
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