Inverted Yield Curve-An Omen?
What’s the hype about the Inverted yield curve? Why it has been the talk of the town in recent months??
Let’s scratch the basics first!
There are 3 types of yield curves —
- Upward sloping / Positively sloped (Long term Interest > short-term Interest)
- Downward sloping / Inverted (Long term Interest < short-term Interest)
- Flat (Long term Interest = short-term Interest)
The yield curve is an important market measure that could clearly communicate economic trouble ahead to an extent. Normally, longer-duration bonds have higher yields than short-duration bonds. This is also called as “healthy yield curve”. Longer duration bonds have usually higher yield so as to compensate them for the longer period of time that there money is invested for.
Yield curve inversion is an important indicator because the Fed monitors it, which consequently shapes their outlook on monetary policy.
It’s Fed because whenever US catches a cold, the whole world sneezes !!
Historically, yield curve inversion has been one of the prominent recession forecasting tools. The timing of that recession can however vary from 5–24 months. This time the yield curve has inverted to an extreme level i.e. inverted more than what was experienced during dot com and the global financial crisis.
Nobody can predict the marker correctly, there will always be some optmisitics and some pessimistics. Only time will tell, let’s gear up for the worst and hope for the best.
Until then, see you next time !!
