PREPARE FOR THE WORST. DANGEROUS YIELD CURVE TREND!

The yield curve has inverted plenty of times in the past, and each time it does, it's like a flashing warning sign for an impending recession. The yield curve has never done this before. But this one, it’s breaking records. The real question is what will the real impact be? for the economy, the stock markets and for the average Joe? If the yield curve un-inverts with the long bond yields going higher instead of the short term bonds going lower, are we about to see a sovereign debt crisis in the Western world? Like Greece saw in the mid 2000's? Will banks and credit freeze? If the FED intervenes and starts buying long term bonds, will we see massive inflation spike up again? Are we in for something completely unexpected? Buckle up, because this financial rollercoaster just got a whole lot more intriguing!
As usual, it all goes back to the Fed. To fight high inflation, the Fed has been consistently raising interest rates. As of July 2023, interest rates have increased 11 times since March 2022, going from 0.25% to 5.50%. For investors in fixed-income investments, rising interest rates have translated to higher rates on U.S. Treasuries and deposit accounts like checking and savings accounts. But these increases could also mean trouble ahead. Now, you always hear the news talking about the yield curve. Basically, it’s a graph that shows the interest rates of U.S. Treasuries over a different range of maturities. In "normal" times, the yield curve slopes upward to the right because investors earn higher yields the longer it takes a bond to mature. Short-term bonds provide less income to investors because holding an investment for a shorter time involves less risk. A downward-tending or “inverted” yield curve means that you earn less on securities that you plan to hold for longer, and is a sign that something in the economy is amiss. I mean, what incentive would someone have to buy a longer-term bond when they can earn more while having their money locked up for a shorter period? Chances are they wouldn't, which is part of the problem with the current U.S. yield curve. Thanks to the Fed raising interest rates, short-term rates between four to 52 weeks are aggressively higher than longer-term bonds over five years. I mean, it's definitely a hard sell to convince someone that a 10-year bond at 4.2% interest is a better investment than a four-week bond of just over 5.5%.
And this inverted yield curve usually predicts a recession in the offing for a lot of reasons. If banks can earn more money by holding on to short-term Treasury bonds than by lending for a longer timeframe, they may decide to slow down long-term lending, like mortgages, to maximize short-term profits.Show more

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