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INVERTED YIELD CURVE: Why Does It Predict A Recession?
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Why does an inverted yield curve predict a recession?
I see this MENTIONED all the time, but never EXPLAINED, so I’m here to help in 2 simple steps.
First, let’s make sure you know what an inverted yield curve is. That’s when the yields on short-term bonds are higher than the yields on longer-term bonds. Normally this doesn’t happen because investors demand extra yield to lock up their money for longer – which is essentially taking on more risk.
Now that you understand what an inverted yield curve IS, I can show you the link between an inverted yield curve and a recession.
As I explained more in-depth in a recent video, the yield curve tells you where interest rates are EXPECTED to be in the future.
An inverted yield curve, with LOWER interest rates in the future, means the market thinks the Fed will be CUTTING interest rates soon.
Why does the FED cut rates? To stimulate the economy.
That means that when the market is pricing in a bunch of rate cuts, and the yield curve is inverted like it is now, it’s predicting a weak economy and probably a recession.
#recession #yieldcurve #fundamentalsoffinance
I see this MENTIONED all the time, but never EXPLAINED, so I’m here to help in 2 simple steps.
First, let’s make sure you know what an inverted yield curve is. That’s when the yields on short-term bonds are higher than the yields on longer-term bonds. Normally this doesn’t happen because investors demand extra yield to lock up their money for longer – which is essentially taking on more risk.
Now that you understand what an inverted yield curve IS, I can show you the link between an inverted yield curve and a recession.
As I explained more in-depth in a recent video, the yield curve tells you where interest rates are EXPECTED to be in the future.
An inverted yield curve, with LOWER interest rates in the future, means the market thinks the Fed will be CUTTING interest rates soon.
Why does the FED cut rates? To stimulate the economy.
That means that when the market is pricing in a bunch of rate cuts, and the yield curve is inverted like it is now, it’s predicting a weak economy and probably a recession.
#recession #yieldcurve #fundamentalsoffinance
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