YIELD CURVE INVERSIONS....THEY ARE A REGULAR THINGS THESE DAYS.... (OUCH!)

WHAT ARE YIELD CURVE INVERSIONS?

Simply put, the cost of borrowing money generally goes up the longer the loan is...that is, the lender is taking on all kinds of extra risk over that longer time. So interest rates on longer term loans are typically higher than those on shorter term loans.....and bond are just debt instruments, a lender contract with a borrower.

So it is quite normal for say a 30 year bond to have a higher interest rate than a 20 year bond, which is higher than a 2 year bond and so forth.

A yield curve inversion exists when the shorter term bonds have a higher interest rate than the longer term bonds.

Here is a Wikipedia article on yield curves: https://www.investopedia.com/terms/i/invertedyieldcurve.asp

HOW ARE THE YIELD CURVES PRESENTLY?

Well, they are significantly inverted, and have been for a bit as of late. But this isn't the first time in recent history they have been inverted......I track the yield curves with a spreadsheet, and I saw them inverting early this year.

Here is my spreadsheet showing the current inversion:

The square that I have hilighted is what is known as the 2's/10's calculation.....a comparison of the 10 year rate and the 2 year rate...this is the relationship that most focus in on....I understand the Federal Reserve focuses in on the comparing the 10 year and the 1 year, smoothed with a 3 month moving average.

Here is an example from the FED Website.....albeit older:

SO WHAT DOES THIS SIGNAL?

It is a reliable signal of recession.....roughly 6 to 18 months after the inversion. So the inversion earlier this year could have been a sign of our being in a recession right now! We shall see how the government office that calls these things feels before the elections I guess. Bit either way, we are getting some heavy duty inversion right now.....so IMHO, if we are not in recession currently, we will be in short order.

Here is another article that talks about how & why inversions have predictive power: https://www.unionbank.com/private-banking/perspectives/market-economic-outlook/inverted-yield-curve-explained

HOW ABOUT OTHER COUNTRIES AND THEIR YIELD CURVES?

Well, I am not sure how predictive this is in other countries, but it seems to me the general concept should generally apply.....so here is a list of countries with inverted yield curves as I type this. (This week)

Also, here is the article that the above graph was sourced from.   http://www.worldgovernmentbonds.com/inverted-yield-curves/

WHAT TO DO?

I just suggest you prepare for a recession.....and in this case, perhaps an inflationary one. (whether inflation is high or lower, I suspect it will be higher than any wage / benefit increases we will be seeing because of the slowing economy)

So perhaps be UBER careful with debt.....in fact, try to get out from under it unless it is long term with low rates. Try to save money for that rainy day....the one you might see with a job / benefits loss. Also, get your cash flow under control.....spending down, saving up. (I wouldn't just make a plan for it, I would kick that plan into action and get ahead of it)