Oct 2, 2019
This week, I’m getting my beloved crystal ball out to tell you why I think a lot of the recession rumors out there right now are based more on sensationalism than actual data, and why I’m still positive about the direction of the economy and hence, the stock market.
Today, let’s talk about inverted yield curves. Yikes, that sounds like some crazy health contraption, but it’s a real thing, and historically has been a strong predictor of a looming recession, which is why the recent inversion of the yield curve has all the talking heads on TV freaking out!
Let’s back up for a minute so I can share with you what an inverted yield curve is, and why it matters. Under normal circumstances, longer-term yields on bonds are higher than shorter term yields. Think about it this way - let’s say you go down to the bank wanting to buy a Certificate of Deposit aka a CD. They tell you that you can buy a 6 month CD, a 1 year CD, or a 5 year CD. You would expect that the 6 month CD would pay you the lowest yield, maybe 1%, the 1 year CD would pay a little bit more, say 2%, and the 5-year CD would pay you the highest yield, to reward you for tying up your money for so much longer.
But when the yield curve inverts, that means that shorter-term yields pay you more than longer term yields, so the 1 year CD is now paying a higher yield than the 5 year CD. It makes no sense! Why would you tie up your money for 5 years and receive a lower return than tying up your money for 1 year?
Well. it’s all about future expectations. If I expect the economy to get worse over the next couple years and inflation to stay low, I’m going to demand more yield for shorter-term bonds, and buy longer-term bonds. When I do this, along with everyone else, the demand for longer-term bonds go up, prices go up, yields go down, and the yield curve inverts.
When the yield curve of the 2 year and 10 year treasury inverts, that’s predicted every recession since 1955. So that perfect batting average has everyone worried. But the key here is that once the yield curve inverts, it took an average of 18 months for the recession to hit, and it could be as long as 3 years based on history. So it’s not like the recession is looming when the curve inverts.
So I wouldn’t batten down the hatches just yet.
If you’re getting close to retirement, you’re probably concerned about how your retirement portfolio will fare in the next recession. Your retirement is perhaps the most important financial decision you’ll ever make. You want to get it right. Well at my business, True North Retirement Advisors, so do we. If you head on over to truenorthra.com, you can book a 15 minute call with me, at a time that’s convenient for you to talk about right there on on our homepage. I’d love to help you on your journey to a financially secure retirement. So head on over to truenorthra.com and book a call.
That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip.
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