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WTF Is The Yield Curve And Why Is Everyone Freaking Out About It

Leah Bourne
August 14, 2019

There’s been speculation among financial experts of an upcoming recession for a while now, but this morning, that kicked into overdrive as the Dow plunged more than 700 points — making it a pretty terrible day for the US stock market. And a lot of that was attributed to the yield curve.

For anyone who is invested in the stock market whether via a 401(k) or individual stocks it is incredibly important to understand what is going on.

That’s why we are breaking it down, minus the jargon.

What’s happening in a nutshell?

Yields on 10-year US Treasury bonds dipped below the yield on the US Treasury 2-year bond today.

Why is this a big deal?

This was the first time the 10-year yield was below the 2-year yield since 2007 — just before the Great Recession. Both were hovering around 1.6%. A lot of financial experts are pointing to this as a indicator that a recession is looming.

OK, but what exactly is the yield curve and why should I care?

When people refer to the yield curve they are talking about the difference between interest rates on long-term versus short-term bonds. For the most part, long-term bonds pay higher rates of interest. But, when the yield curve is inverted, shorter-term bonds pay more.

Why is this something to be wary of, you ask?

For the most part, investors expect a higher rate of return on longer-term bonds because they are assuming more risk. When that isn’t the case, something is off.

“Historically speaking, the inversion of that benchmark yield curve measure means that we now must expect a recession anywhere from six-to-18 months from today,” said Tom Essaye, founder of The Sevens Report, an investment research firm, in a note to clients today.

Now what should you do?

This might be a good time to assess your risk in any of your investments and to talk to a financial adviser if you have one available to you about next steps. Also, don’t panic, not everyone is agreement about what exactly this means.
We’ll be watching this space.
Feature Illustration: Laura Caseley For The Money Manual

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