The other day I got a phone call from one of my friends (not a client) and he said in a serious tone “inverted yield curve”…what is it?”
There has been a lot of doom and gloom talk in the air lately. There are plenty of reasons for this but one that has been hitting the financial news pretty hard is the Inverted Yield Curve. The reasons for an inverted yield curve are complicated but the definition isn’t.
All that it is is the circumstance when a longer term Treasury bonds are yielding less than a shorter term Treasury bond.
At one point on August 15th the 2- year Treasury note had a higher yield than the 10 year Treasury note. This happened again on August 22nd.
In other words, you would be paid less annual interest loaning your money to the US Govt for 10 years than you would be for loaning them money for 2 years.
Normally, the longer the time period you lend money, the higher the interest rate you expect to receive.
The stock market had a panic selloff when the inversion initial occurred because historically inverted yield curves precede recessions. And of course, recessions aren’t generally good for stock prices.
I’m not so sure a one day or a two day inversion necessarily signals recession but if the inversion lasts for a month or so I’d have to reassess my thinking.
There is an old saying in the investment business “what everybody knows, isn’t worth knowing.”
The fact that many of the market pundits are pounding the table about the recession signal of the inverted yield curve, maybe talks to that point.
And remember this point…it is not marked in stone that you have to have a recession after the yield curve inverts. Let’s see how things play out in the coming months…One thing to be concerned about is talking ourselves into a recession. That can happen.
It is said that the market doesn’t like uncertainty. Well, you tell me a time when there is no uncertainly and I’ll shake your hand.
There is always going to be uncertainty, but as we come into the end of the year we might have more clarity from which to draw conclusions.
We’ll look forward to next year; we hope it will provide us with a little better vision of the future. After all, it will be 2020.
