You've probably heard about this in the financial press recently: this sinister, notorious thing called the "inversion of the yield curve." Should investors be concerned about this event? And why are analysts, scouts and traders – and even the president of the United States – so obsessed with the inverse of the yield curve?
A clear study of what the yield curve is, how it can affect stock markets and what it means to you as a trader to help you analyze financial news. This understanding can also help you act accordingly – if necessary.
Strange Days in the Bond Market
When you buy a US Treasury bond with the Treasury, you basically lend your money to the government for a fixed period. Or you could look at it another way. The government safely stores your capital in case the stock market crashes and the value of the dollar collapses. Traditionally, the government will reward you for entrusting it with your money by paying distribution.
In the old days, when I was young, the annual yield on a ten-year bond was about 5%. This yield was less than the average stock market return of 8% per year, but it carried less risk. (After all, they call bond profit the "risk-free rate"). Nowadays, a 5% annual return on a ten-year bond is completely off. Federal Reserve Chairman Jerome Powell briefly raised the percentage to 3% in the fourth quarter of last year. As a result, the stock market registered. Gives 20%.
As I write this, the ten-year financial return is only 1
On the same day, the yield curve is actually "inverted", which means that the ten-year yield was less than the two-year yield. This is extremely unusual, since a two-year loan from your government money does not theoretically need you pays more than a ten-year loan. Other yield curves have already been reversed before (including quarterly and ten-year yields, if you can believe it). But the ten- and two-year spread is the most widely and closely watched.
What is the inversion of the yield curve?
Some analysts see the bond market's unwillingness to commit to a ten-year government loan as a bad sign. This may mean that they are not confident in the government's ability to handle their business. In other words, people are looking to take short-term loans because they have pessimistic long-term prospects for the US economy. It has been said that the bond market is always smarter than the stock market, so the euphoric S&P 500 near the highest times and the dreaded bond market could really mean future problems. The S&P 500 ETF (SPY) is up nearly 14% annually by the end of Friday. Meanwhile, the iShares 7-10 year ETF (IEF) bond is up almost 9%.
Knowing that the inversion of the ten and two year curve of the yield curve preceded the last two economic recessions, on 14 August the stock market collapsed with the S&P 500 (SPY), making a 3% hairstyle. Nobody is happy this fall, President Trump tweeted "CRAZY INVERTED YIELD CURVE! We should easily reap great rewards and profits, but the Fed holds us back. "Trump also called Jamie Dimon, CEO of JPMorgan (JPM), as well as CEOs of Bank of America (BAC) and Citigroup (C
. Soon after, the ten- and two-year yield curve was not reversed. But then he again turned on August 22. At 4.05 pm ET that day, the two-year cashier yield was 1.614% while the ten-year yield was 1.611%. By the time of this publication, the yield curve can be inverted, flattened, or inverted (i.e. "normal").
Very close conversation
That's a big is part of the charm of the market with a yield curve At the moment it is a very close call and too early to say whether it will remain inverted or not.If it is reversed for months, some analysts believe this is an indicator of a likely collapse of And as the Federal Reserve is likely to seek to reduce ten-year bond yields even further in the near future, warning signals may flash earlier than anyone expected.
To this text, David Model has held no position in any of the securities mentioned above.