Difference between revisions of "Inverted Yield Curve"

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An inverted yield curve is an interest rate environment in which long-term debt instruments such as 10-year notes have a lower yield than short-term debt instruments such as 2-year bills. An inverted yield curve is considered a barometer or early warning of an impending economic recession because many economists view this situation as showing little confidence in the short-term economy. In a healthy economy, longer-term bond yields are significantly higher than short-term instruments.
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An inverted yield curve is an interest rate environment in which long-term debt instruments such as 10-year notes have a lower yield than short-term debt instruments such as 2-year bills. An inverted yield curve is considered a barometer or early warning of an impending economic recession because many economists view this situation as showing little confidence in the short-term economy. In a healthy economy, longer-term bond yields are significantly higher than short-term instruments. This makes sense because those lending their money to the U.S. government for a longer term would expect to be paid more than those lending the money for only a short term.
  
 
The most recent example of this was on August 14, 2019 when the yield on the 2-year rose to 1.634%, briefly rising above the 10-year note rate of 1.623%. The prior inversion occurred in June 2007, before the [[2008 Global Financial Crisis]] and subsequent "Great Recession."<ref>{{cite web|url=https://www.cnbc.com/2019/08/13/us-bonds-yield-curve-at-flattest-level-since-2007-amid-risk-off-sentiment.html|name=Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning|org=CNBC|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.reuters.com/article/global-markets/global-markets-stocks-oil-tank-on-growing-signs-of-global-slowdown-idUSL8N25A5KK|name=Stocks, oil tank on growing signs of global slowdown|org=Reuters|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.bloomberg.com/news/articles/2019-08-14/u-k-yield-curve-inverts-for-first-time-since-financial-crisis|name=Bond Rally Charges On With 30-Year Treasury Yields Below 2%|org=Bloomberg|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.thebalance.com/inverted-yield-curve-3305856|name=Inverted Yield Curve and Why It Predicts a Recession |org=The Balance|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-china-trump-tariffs-retaliation-inverted-yield-curve-stock-market-rally/|name=Dow Jones Futures Rally Amid Volatile China Trade War Headlines, Strong Walmart Earnings |org=Investors Business Daily|date=August 15, 2019}}</ref>  
 
The most recent example of this was on August 14, 2019 when the yield on the 2-year rose to 1.634%, briefly rising above the 10-year note rate of 1.623%. The prior inversion occurred in June 2007, before the [[2008 Global Financial Crisis]] and subsequent "Great Recession."<ref>{{cite web|url=https://www.cnbc.com/2019/08/13/us-bonds-yield-curve-at-flattest-level-since-2007-amid-risk-off-sentiment.html|name=Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning|org=CNBC|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.reuters.com/article/global-markets/global-markets-stocks-oil-tank-on-growing-signs-of-global-slowdown-idUSL8N25A5KK|name=Stocks, oil tank on growing signs of global slowdown|org=Reuters|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.bloomberg.com/news/articles/2019-08-14/u-k-yield-curve-inverts-for-first-time-since-financial-crisis|name=Bond Rally Charges On With 30-Year Treasury Yields Below 2%|org=Bloomberg|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.thebalance.com/inverted-yield-curve-3305856|name=Inverted Yield Curve and Why It Predicts a Recession |org=The Balance|date=August 15, 2019}}</ref><ref>{{cite web|url=https://www.investors.com/market-trend/stock-market-today/dow-jones-futures-china-trump-tariffs-retaliation-inverted-yield-curve-stock-market-rally/|name=Dow Jones Futures Rally Amid Volatile China Trade War Headlines, Strong Walmart Earnings |org=Investors Business Daily|date=August 15, 2019}}</ref>  

Revision as of 13:15, 15 August 2019

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An inverted yield curve is an interest rate environment in which long-term debt instruments such as 10-year notes have a lower yield than short-term debt instruments such as 2-year bills. An inverted yield curve is considered a barometer or early warning of an impending economic recession because many economists view this situation as showing little confidence in the short-term economy. In a healthy economy, longer-term bond yields are significantly higher than short-term instruments. This makes sense because those lending their money to the U.S. government for a longer term would expect to be paid more than those lending the money for only a short term.

The most recent example of this was on August 14, 2019 when the yield on the 2-year rose to 1.634%, briefly rising above the 10-year note rate of 1.623%. The prior inversion occurred in June 2007, before the 2008 Global Financial Crisis and subsequent "Great Recession."[1][2][3][4][5]

Data from Credit Suisse from 1978 to 2019 showed that the previous five inverted yield curve events between 2-year and 10-year yields led to recessions on average within 22 months. Bank of American Merrill Lynch research put that average lead time at about 15 months.

There is debate on the reliability of the inverted yield curve as an indicator of an impending economic downturn. Some economists say the inverted yield curve may not predict the next recession because of quantitative easing measures taken by central banks during the 2008 Financial Crisis. This essentially meant that central banks purchased government bonds, driving down longer-term yields. That may distort the inverted yield curve as a predictor.

Other economists have said the inverted yield curve is just one of many possible indicators of a recession.[6]

References

  1. Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning. CNBC.
  2. Stocks, oil tank on growing signs of global slowdown. Reuters.
  3. Bond Rally Charges On With 30-Year Treasury Yields Below 2%. Bloomberg.
  4. Inverted Yield Curve and Why It Predicts a Recession. The Balance.
  5. Dow Jones Futures Rally Amid Volatile China Trade War Headlines, Strong Walmart Earnings. Investors Business Daily.
  6. 5 things investors need to know about an inverted yield curve. MarketWatch.