CHART OF THE WEEK 📈
The yield curve is usually seen as an indicator of the future state of the economy. Inversions in the yield curve have been a reliable sign of looming recession. And at the moment, the degree of inversion in the yield curve is at its highest in decades.
So much talk about the yield curve - here’s all you need to know!
What is a yield curve? It’s just a chart showing the yield of bonds at different maturities. The return you get on a bond, which matures in a certain number of years.
What is normal? Normally, you get lower returns for shorter maturity, and higher for longer maturity.
Why does it get inverted? When investors worry about a recession, they want to lock their money in long-term government bonds, which is the safest asset class. When the demand for long term bonds increases, the price of those bonds increases. When prices of bonds rise, their yields fall.
Is it getting worse? Yes - the yield curve right now is at its most inverted in decades. This indicates very high pessimism, which seems justified given the steep rate hikes by the Fed, and challenges around a consequent ‘soft landing’ for the economy.
US GDP fell 0.9% in 2Q, its second consecutive drop, and a strong indication of a looming recession, which the yield curve already indicated. The contraction comes after two consecutive 75bps hikes by the Fed.