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.