{"id":16918,"date":"2019-08-22T08:12:45","date_gmt":"2019-08-22T07:12:45","guid":{"rendered":"https:\/\/traders-paradise.com\/?p=16918"},"modified":"2019-09-06T20:15:33","modified_gmt":"2019-09-06T19:15:33","slug":"what-is-yield-curve","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/","title":{"rendered":"The Yield Curve is Inverted &#8211; Be Worried"},"content":{"rendered":"<p style=\"text-align: right;\"><em>5 min read<\/em><\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-16922 size-full\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1.jpg\" alt=\"The yield curve is inverted - Be Worried\" width=\"800\" height=\"533\" srcset=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1.jpg 800w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1-300x200.jpg 300w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1-768x512.jpg 768w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1-370x247.jpg 370w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1-760x506.jpg 760w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/curve-1-424x282.jpg 424w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#by_Gorica_Gligorijevic\" >by Gorica Gligorijevic<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#A_yield_curve_gives_us_the_possibility_to_clearly_see_this_difference\" >A yield curve gives us the possibility to clearly see this difference.\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#Then_we_can_say_it_is_an_inverted_yield_curve\" >Then we can say it is an inverted yield curve.<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#But_what_happens\" >But, what happens?\u00a0<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#Yet_the_curve_yield_had_reverted_by_the_end_of_the_week\" >Yet, the curve yield had reverted by the end of the week.\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#Last_week_in_Europe_many_bonds_sloped_down_in_yield\" >Last week in Europe, many bonds sloped down in yield.\u00a0<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2019\/08\/what-is-yield-curve\/#Many_experts_admit_this_inversion_should_make_you_worried\" >Many experts admit this inversion should make you worried.<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h6><span class=\"ez-toc-section\" id=\"by_Gorica_Gligorijevic\"><\/span><em>by Gorica Gligorijevic<\/em><span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p><span style=\"font-weight: 400;\">The yield curve displays the price of borrowing money in the <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/07\/investing-bonds\/\">bond market<\/a>. In essence, it is a way to measure bond investors&#8217; feelings about risk. The yield curve has a great influence decision about your investments in the bonds market.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">We are very often talking about interest rates as all rates work in the same way. But the reality is far more complicated.<br \/>\n<\/span><span style=\"font-weight: 400;\">You&#8217;ll find rates on different bonds behaving differently from one to another. It depends on their maturity.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"A_yield_curve_gives_us_the_possibility_to_clearly_see_this_difference\"><\/span><b>A yield curve gives us the possibility to clearly see this difference.\u00a0<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">It&#8217;s a graphic representation of the yields available for bonds of equivalent credit status but different maturity dates. A yield curve can be used to estimate the direction of the economy if we are analyzing government bonds.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The yield curve follows the interest rates of bonds. And particularly important is the spread between 2 and 10 years Treasury bonds. Using it you can measure the way investors think about risk and prospects for economic growth.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">\u00a0<img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-16919 size-full\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/yield-curve-1.jpg\" alt=\"The yield curve\" width=\"640\" height=\"385\" srcset=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/yield-curve-1.jpg 640w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/yield-curve-1-300x180.jpg 300w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/yield-curve-1-370x223.jpg 370w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/yield-curve-1-424x255.jpg 424w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/yield-curve-1-639x385.jpg 639w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">When investors are worried or get nervous about economic growth, the yield curve inverts. What that means is that short-term interest rates become higher than longer-term ones.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The short-term bonds carry lower yields as a reflection of the fact that an investor&#8217;s money is at less risk. The reason behind is the longer you invest, the more you should be rewarded, or rewarded for the risk. You can see the normal curve yield when bond investors suppose the economy to develop at a normal pace. The investors don&#8217;t feel there will be some radical changes in the rate of inflation or significant gaps in credit availability.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But sometimes, the curve&#8217;s configuration diverges. That is a signal of possible turning points in the economy.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Then_we_can_say_it_is_an_inverted_yield_curve\"><\/span><b>Then we can say it is an inverted yield curve<\/b><span style=\"font-weight: 400;\">.<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-16920 size-full\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1.jpg\" alt=\"The inverted yield curve\" width=\"800\" height=\"366\" srcset=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1.jpg 800w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1-300x137.jpg 300w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1-768x351.jpg 768w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1-370x169.jpg 370w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1-760x348.jpg 760w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-1-424x194.jpg 424w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">Many studies confirmed the ability of the slope of the yield curve to predict <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/01\/crisis-black-forecast-2019\/\">recessions<\/a>. And in the past 50 years, every recession in the US followed such inversion, while only once the inverted yield curve was not followed by a recession.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">An inverted yield curve marks a point on a chart where short-term investments in bonds pay more than long-term ones. When they turn up it is a bad sign for the economy.<br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Receiving more interest for a short-term rather than a long-term investment doesn&#8217;t seem to have any economic sense.<br \/>\n<\/span><span style=\"font-weight: 400;\">To make this clear, when you put your money in the bank, the bank will pay you interest rate. If you put your money on 6 months the interest rate is lower than if you put it on 6 years.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But can you imagine if this was inverted? Imagine the situation when the bank pays more for the 6 months than the 6 years.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That is happening when the <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/05\/young-investors-stress\/\">investors\u2019 fears<\/a> of an impending recession are growing. In such periods investors are selling stocks and shifting their money to the long maturity bonds. That means they don&#8217;t trust in the economy and want to secure their capital until the storm passes. Honestly, it is a better solution than potential losses they could make by holding stocks during the recession.\u00a0<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"But_what_happens\"><\/span><b>But, what happens?<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">As demand for bonds increases, the yield they pay decreases.<br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This kind of investors&#8217; loss of confidence is followed by an inverted curve yield. We can see that since 1956.<br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Also, the inversion started in December 2005 and announced the Great Recession. It actually started at the end of 2007, but the full-blown crisis occurred in 2008.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Furthermore, an inversion was noticed before the tech bubble burst in 2001.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That\u2019s why inversion is so horrible. Does this mean that we have a big downturn in the <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/trading-with-success-guide-for-beginners\/\">stock market<\/a>? Not for sure.<br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Inversion of the US Treasury yield curve caused a great reaction in markets last week. Losses were around 3% for the major US indices in one day. The media were on fire. And the whole world as well.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Yet_the_curve_yield_had_reverted_by_the_end_of_the_week\"><\/span><b>Yet, the curve yield had reverted by the end of the week<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-16921 size-full\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1.png\" alt=\"\" width=\"800\" height=\"464\" srcset=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1.png 800w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1-300x174.png 300w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1-768x445.png 768w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1-370x215.png 370w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1-760x441.png 760w, https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2019\/08\/inverted-yield-curve-2-1-424x246.png 424w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/><\/span><\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"font-weight: 400;\">But it can invert again in the coming months. Let\u2019s contemplate why fear may not be realistic.<br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">First of all, investors would lock up their <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/trading-options\/\">capital<\/a> if they feel that that the yield on the long maturity will fall dramatically.<br \/>\n<\/span><span style=\"font-weight: 400;\">That would be a sign that the US economy was to slow noticeably.<br \/>\n<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But investors will buy bonds when expecting price appreciation, also.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Last_week_in_Europe_many_bonds_sloped_down_in_yield\"><\/span><b>Last week in Europe, many bonds sloped down in yield.<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">That produced the stock of negative-yielding bonds to over $16 trillion.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Who will be the savior?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The European Central Bank. It can easily restart its large-scale assets-buying program and, by doing so, push its policy rates even more into negative.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The other reason, international bond <a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/03\/financial-markets\/\">markets<\/a> are more connected than national markets. Meaning, what\u2019s occurring to US yields is also a consequence of what\u2019s happening abroad. We saw this last week when the US curve inversion reflected insufficient growth indicators from China, Europe, and Singapore.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Germany, Europe\u2019s largest and most stable economy had an influence too.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">On Sunday, August 18, White House trade adviser Peter Navarro told <a href=\"https:\/\/edition.cnn.com\/\">CNN<\/a>&#8216;s, Jake Tapper:<\/span><\/p>\n<p><span style=\"font-weight: 400;\">&#8220;Technically, we did not have a yield curve inversion. An inverted yield curve requires a big spread between the short and the long &#8211;we had a flat curve that was a weak signal of any possibility. In this case, the flat curve is the result of a strong Trump economy.&#8221;<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The fact is that the inversion did happen.\u00a0<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Many_experts_admit_this_inversion_should_make_you_worried\"><\/span><b>Many experts admit this inversion should make you worried.<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">The yield curve &#8220;is one of the most reliable market indicators that we have and it&#8217;s not sending real warm and fuzzy signals,&#8221; said Mark Cabana, head of US Rates Strategy at Bank of America Merrill Lynch Global Research.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Yes, the inverted yield curve isn&#8217;t a 100% sure sign for inflation or recession but, according to Bank of America, since late March, the gap between 3-month interest rates and 10-year has inverted on and off.<\/span><\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>5 min read by Gorica Gligorijevic The yield curve displays the price of borrowing money in the bond market. In essence, it is a way to measure bond investors&#8217; feelings about risk. The yield curve has a great influence decision about your investments in the bonds market. We are very often talking about interest rates [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":16923,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1004,1005],"tags":[250,733,1191,1192,1190],"class_list":["post-16918","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-latest-financial-news","category-market-today","tag-bonds","tag-crisis","tag-inverted-yield-curve","tag-recesion","tag-yield-curve"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The yield curve is inverted - Be Worried - Traders-Paradise<\/title>\n<meta name=\"description\" content=\"The yield curve displays the price of borrowing money in the bond market. 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