Weekly Brief: Inverted Yield Curve, How Concerned Should We Be?

The last time the 10-year to the two-year section of the yield curve inverted was in August 2019, months before COVID-19 slammed the economy, causing a short but dramatic economic downturn.

What is the Yield Curve?

The yield curve here refers to the yield on the 10-year treasury note minus the yield on the 2-year treasury note. As a long time frame means more uncertainty for investors to weather, the typical yield should be higher for longer-dated maturities, meaning, investors get paid more interest for the money they lent out for a longer period of time, and lower for shorter-dated maturities, meaning, investors receive less interest compared to those who purchase longer-dated treasuries.

Source: https://xplaind.com/128027/yield-curve

What Happens When the Curve Inverts?

When this happens, it means investors actually receive more interest on their 2-year treasury note versus the 10-year treasury note. Why does this occur, and what does it signal to the market?

The mainstream interpretation is: An inverted yield curve reflects the bond market’s expectation for the Fed to cut rates down the line. The Fed normally cuts rates in response to an economic downturn, hence why an inverted curve could be a recession signal.

How Should We Respond?

Usually, it’s a bad idea to rely solely on one indicator for your investment decisions. But then. at the end of the day, “no one knows if a recession is on the horizon or whether this is the first time in 50 years that the inverted yield curve turns out to be a false signal.”

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References

Roy, S. (n.d.). What the inverted yield curve means for the economy. Yahoo! Finance. Retrieved April 9, 2022, from https://finance.yahoo.com/news/inverted-yield-curve-means-economy-123000655.html