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Turning the Bond Market Upside Down: Inverted Yield Curves

yieldcurveinverted [1] According to Investopedia.com an inverted yield curve is a “Usually a chart showing long-term debt instruments that have lower yields than short-term debt instruments. It is sometimes referred to as a negative yield curve.” But they are cause for concern: “History has shown that inversions of the yield curve have preceded the last five U.S. recessions. The yield curve can accurately forecast the turning points of the business cycle.”

invertedyieldsign [2]

Why would investors accept lower long terms rates than short term rates?

According to SmartMoney.com [3] “The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They’re betting that this is their last chance to lock in rates before the bottom falls out. Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown or outright recession as well as lower interest rates across the board.”

Perhaps this is an indicator that the economy will stall, and rates will go down even further. Stay tuned.

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