April 6, 2022
Inverted Yield Curve. It’s a phrase you may have heard before. More financial gibberish, right?
Paying attention to the yield curve is critical because it may indicate there’s a recession on the horizon. And as of March 29, 2022, it inverted for the first time since 2019.¹
What Is the Yield Curve?
The yield curve is simply a graph that shows the interest rates of different types of bonds. With a normal yield curve, bonds with lower lifespans (i.e., maturity) have lower interest rates. That’s because they’ll face less inflation and need less growth to keep up. By that logic, bonds with longer maturities have higher interest rates.
Put simply, if the yield curve is normal, a bond with a two year maturity will have a lower interest rate than a bond with a thirty year maturity.
So what happens when that gets inverted? Bonds with short maturities have higher interest rates, and bonds with long maturities have lower interest rates.
Why is that a big deal? Because it’s consistently correlated with economic recession. There have been 28 inverted yield curves since 1900, and 22 have correlated with recessions.²
And the average lead time from when the yield curve inverted to when the recession began was around 22 months.
This is not to say that you should start buying land in West Virginia or emergency rations. These are unprecedented times, and there may be other factors at play. But it’s at least a check engine light for your finances. Are you prepared for job instability? Is your emergency fund fully stocked? The time to start preparing for these possibilities is now. Meet with your financial pro today to make sure you’re prepared for whatever the future holds.
¹⁺² “Explainer: U.S. yield curve inversion - What is it telling us?” David Randall, Davide Barbuscia and Saqib Iqbal Ahmed, Reuters, Mar 29, 2022, https://www.reuters.com/business/finance/us-yield-curve-inversion-what-is-it-telling-us-2022-03-29/