[VIDEO] Why Investors Are Obsessed With the Inverted Yield Curve

August 23, 2019

Last Wednesday, the stock market tanked after the yield curve for the bond market became inverted, meaning that interest rates on short-term bonds grew higher than those paid on long-term bonds. The video below takes a look at this complicated concept and explains why the “inverted yield curve” can be a warning sign of a recession. 

Questions:

  1. What is the difference between short-term and long-term bonds? 
  2. Why do investors consider the inverted yield curve to be a potential sign of a recession?

4 Responses to [VIDEO] Why Investors Are Obsessed With the Inverted Yield Curve

  • 1. Short-term bonds often produce low yields since it is not heavily affected by interest rates. On the other hand, long-term bonds are able to create higher yields due to the fact that with it being commonly having a maturity of over a year, it is subject to changes in interest rates.
    2. Investors consider the inverted yield curve to be a potential sign of a recession for the reason that in the past, every time it happened, a recession usually follows it.

  • 1. Short-term bonds tend to have low risks and low yields. While long-terms bonds usually have higher yields but also higher risks.
    2. They fear that the economy may be going down so they take there money out of short-term bonds and put them into long-term bonds instead, they can see that the yield maybe going flat because the feds make it and this causes the yield curve to even out.

  • 1. Short-term bonds tend to have low risks and low yields. While long-terms bonds usually have higher yields but also higher risks.
    2. They fear that the economy may be going down so they take there money out of short-term bonds and put them into long-term bonds instead, they can see that the yield maybe going flat because the feds make it and this causes the yield curve to even out.

  • 1. Short-terms bonds give less risk to the investor but also give out smaller yields as the investor is only gaining interest per $100 annually, so if it gained more years, the more interest would be received by the investor. For long-term bonds, the gain is larger because there is more time for the bond to be paid back. (interest per $100 owed annually)
    2. The bond prices are becoming more expensive so Feds can restrict the buying of bonds so they can limit inflation since unemployment is down and that means more people will be buying more bonds. Now the yield curve is flattening and starting to invert.

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