Re:Yield Curve Is More Inverted Than at This Point in Run-Up...
by throw0101a on Tuesday March 26, 2019 @01:53PM
(#19494323)
> Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond?
Well, what do you do with the cash once the six month bond matures? IF a recession comes along, you'll be looking for a place for your cash in a financial environment that may be quite bad.
People go to 10Y bonds because any financial storms would have likely blown over by then. And keep in mind that the average time between inversion and a recession is 311 days. [1] And then on top of that you'll want some recovery time.
So you're looking at least 2 years before things hypothetically blow over. And US bonds only come in certain increments: 2Y may be overly optimistic, and the next jump after that is 5Y (then 10Y).
10Y may also be more liquid, so people just mostly skip 5Y.
Well, what do you do with the cash once the six month bond matures? IF a recession comes along, you'll be looking for a place for your cash in a financial environment that may be quite bad.
People go to 10Y bonds because any financial storms would have likely blown over by then. And keep in mind that the average time between inversion and a recession is 311 days. [1] And then on top of that you'll want some recovery time.
So you're looking at least 2 years before things hypothetically blow over. And US bonds only come in certain increments: 2Y may be overly optimistic, and the next jump after that is 5Y (then 10Y).
10Y may also be more liquid, so people just mostly skip 5Y.
[1] https://seekingalpha.com/article/4250934