Re:U.S. Treasury Yield Curve Inverts for First Time Since 2007
by nramos3 on Saturday March 23, 2019 @02:07PM
(#19471553)
Perfect in layman’s terms. The Federal reserve keeps spewing the economy is so strong and nobody in the bond world is buying it, thus locking in the long term rates now (they’ll never admit a recession is coming, or blindly don’t know).
It’s interesting to note the now 60% of bonds are now inverted, it was just 50% a day ago!!!
Even if one was to say this is just one indicator look at Canada -50% inverted and housing bubble currently
That is true for a booming economy, but not for the inverted yield case.
It all comes down to where investors think the Fed is headed when it comes to interest rates.
For a booming economy the Fed puts up rates in an effort to slow growth.
For a lagging economy the Fed cuts the rate in an effort to stimulate growth.
Now consider the investor wanting to invest in bonds hoping for the best possible return.
In a booming economy you would only invest in short term 5 year bonds because chances are future interest rates will be higher than what you are currently getting.
But for a slowing economy it might be better to invest in the 10 year bond, to lock in a long term interest rate only because in the future interest rates may well be lower.
Now consider the supply and demand forces that also come into play.
When the demand is high the price goes up and the yield goes down and when the demand is low the price goes down and the yield goes up.
So when you have large numbers of investors wanting to get out of 5 year bonds (i.e. high selling) and into 10 year bonds (i.e. high buying) you get this inverted yield situation.