uploads///business _

Yield Curve Inverts for the First Time since 2007

By

Dec. 4 2018, Updated 3:28 p.m. ET

Flattening of the yield curve

A yield curve tracks the yields of Treasury securities maturing at different times. For example, the yield of two-year securities (SHY) is usually lower than that of ten-year securities (IEF) (TLT). The narrowing of the difference between these yields is sometimes referred to as the “flattening of the yield curve.” In contrast, shorter-term security yields becoming larger than longer-term security yields is referred to as “yield curve inversion” (BND). Yield curve inversion is a cause for concern for some bond traders and investors, as it has been an indicator of upcoming recessions.

Article continues below advertisement

Potential slowdown

Yesterday, part of the US Treasuries yield curve inverted for the first time since the recession, with the spread between five- and three-year Treasury yields narrowing to -0.01 percentage points. The most-watched spread, that between two- and ten-year Treasury yields, also narrowed, to 14 basis points. This level is the flattest the spread has been since July 2007, which was right before a recession. The spread, important for gauging recession risk, narrowed due to the two-year yield rising and the ten-year yield falling below 3%, a crucial level.

Market concerns

The spread’s narrowing implies that investors are worried that short-term rates could fall, implying an economic slowdown. Fed rate hikes can flatten the curve more, as they increase short-term rates. Markets are therefore concerned that more hikes from the Fed could invert the curve. In the next part, we’ll discuss what could be spooking bond and stock markets (SPY).

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.