Why Investors Are Obsessed With the Inverted Yield Curve

when markets get shaky investors and economists start talking about the yield curve you know the flattening yield curve has been kind of an overhang converted yield curve yikes inverted yields curves can often but not always predict a recession the reason when the curve inverts investors see it as an omen for an economic recession but what exactly is the yield curve [Music] to understand the yield curve first you have to understand bonds a bond is a chunk of money an investor lends to a company or a government with the agreement that over time they'll be repaid with interest the interest or the amount of money the investor earns annually per 100 of bonds is called the yield the yield curve measures the yields of all the bonds the treasury is selling over a long period of time the x-axis shows when the bonds will be repaid how many months years or decades and the y-axis measures the yield or the interest that bondholders receive annually here's what a normal healthy yield curve looks like this means the economy is expanding you can see that when the market is healthy longer term bonds trade at a higher yield and shorter term bonds traded a lower one so in a healthy yield curve a two-year bond might yield three percent annually and a ten-year bond might get four percent investors and economists look at the way the curve bends to predict the health of the economy so what causes the yield curve to change shape and invert there are two levers the first is the fed which influences short-term bonds on the left side of the curve in a booming economy the fed raises short-term interest rates also known as yields to rein in borrowing they're trying to limit inflation which can get out of hand when too many people are borrowing and economic growth is moving too quickly but when the economy is stagnant the fed often will lower rates to encourage borrowing right now the fed is slowly slowly raising rates the markets have been trending up for the past 10 years and unemployment is way down so they're betting it's time to raise rates and restrict borrowing investor sentiment controls the right side of the chart when investors think the economy is in good shape they take money out of long-term bonds and instead pour their money into riskier assets like stocks the lower demand causes the price of bonds to sink pushing up the yield this is an important point the price of a bond is inversely related to the yield so when bond prices sink the yields rise and vice versa but when investors think the economy is headed for a rough patch they pull their money out of stocks and put it somewhere safer like long-term bonds this causes yields to drop that started to happen at the end of 2018 investors worried that the global economy was slowing down and they put more money in long-term bonds yields which had been above 3 on 10-year treasuries fell closer to 2.5 it sounds like a small difference but that's almost a 20 change this is the key to reading the yield chart when short-term interest rates go up and investor sentiment goes down the yield curve starts to flatten and it can eventually invert investors view this as a bad omen just look at this chart every time the yield curve dips below zero a recession follows so what does the yield curve look like today here's the yield curve in january 2018 and here it is now you can see it's flattening this is a big deal for the markets and perhaps the strongest signal yet that we're headed toward a bear market but we're not there yet the curve is pretty flat but it's not inverted that means for now there's no reason to believe a recession is imminent but if investors put more and more money in long-term bonds and if the fed keeps raising rates that could change

Channel: Wall Street Journal

Views: 464,478

Keywords: YIELD CURVE, INVERTED YIELD CURVE, INVERTED YIELD CURVE 2018, YIELD CURVE INVERSION, YIELD CURVE INVERSION CHART, BONDS, BOND YIELD CURVE INVERSION, YIELD CURVE 2018, THE YIELD CURVE, TREASURY YIELD CURVE, BOND YIELD, YIELD, THE FEDERAL RESERVE, THE FED, INVESTORS, BOND MATURITY, INFLATION, Advice, Political, General News, Personal Investments in Bonds, National Government Debt, Bond Markets, Interest Rates, Prices

Id: bItazfbSptI

Length: 4min 28sec (268 seconds)

Published: Mon Feb 04 2019