You may recall that in August the financial media was practically screaming from the rooftops that the “yield curve inversion” was a sure signal that a major recession was ahead. This was when the 10-year Treasury yield fell below the two-year Treasury yield.
Historically, that’s been a signal that the U.S. economy will fall into recession.
But this time around? Not even a little bit.
At least not in 2019.
The inversion during the summer was due to international capital flight driving the U.S. Treasury yields lower, not because the U.S. economy was about to fall over a cliff.
Now, should we see any big swings in the Treasury yield again, don’t be surprised if the fearmongering media hits the panic button again and tries to scare investors out of the stock market.
Whether or not it’s a situation that’s actually worth panicking over is debatable. But, either way, you need to understand what’s going on here to effectively position your investments for 2020.
So, today, let’s break down what exactly the yield curve is and why it’s the go-to economic indicator.
Yield Curve 101
Basically, the yield curve is a visualization of the interest rates you get from bonds of different durations, from one month up to 30 years.
If everything always worked out logically, the longer-term bonds would yield way more than the shorter-term bonds. After all, you’re tying up your money for longer, so you’d expect to earn a higher rate to help offset any risks that may develop while your money is in that bond.
Well, just like stocks, a bond’s yield is a function of both the payout and the price – which fluctuates in the open market. So, in a volatile market, weird things can happen to the yield curve.
Below you’ll see a more normal Treasury yield curve from May 2018 (the gray line), in which yields gradually get larger for longer-term vs. shorter-term Treasury bonds. However, the current yield curve (the blue line) is pretty flat, i.e. heading toward the situation we saw this summer (the red line). That’s when the yield curve actually inverted, so the short-term bonds yielded MORE than the long-term ones.
Now again, if you look at this logically, the implications are pretty cut and dry. If short-term yields are higher, it’s because bond investors fled from short-term to long-term Treasuries – so they must not be feeling too confident near term.
Also, the banks don’t love this scenario. Remember, a bank works by paying interest on your deposits and collecting interest on your loans. Those loans are based on bonds with longer durations – so when the yield curve inverts, it hurts the big banks’ profitability.
Add it all up and, economists say, it’s a bad omen that a recession is coming.
But, honestly, some economist somewhere is always going to find evidence that a recession is coming. And, eventually, one does – there’s no getting around it.
But the question investors want answered is: WHEN?
That’s one of the things I’ve been researching hard and heavy. I think you’ll be surprised at what I found.
I’m going to lay out all the details of my forecast for 2020 on Tuesday, December 10 at 7 p.m. ET.
That’s when I’ll appear with Matt McCall, one of my colleagues here at InvestorPlace, for the Early Warning Summit 2020.
Anyone can join us – and I hope you do. Click here to give us your RSVP so you don’t miss Tuesday’s event.
Note: There are several headwinds converging in the markets at once and they will drastically impact the share price of virtually every stock. On Tuesday, Dec. 10, at 7 p.m. (EST), I’ll show you what’s going to happen and how you can use it to potentially make a fortune.