The Upside Down - Stranger Things

Mar 27, 2019 | Jeremy Goldfarb


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THE YIELD CURVE IS INVERTED!!

 

I was a fan of stranger things and the "upside down" referred to another dimension on the.....just watch the show. It'll be easier.

 

There has been a lot of yelling about the latest yield curve inversion. Essentially what has happened is that the yield you can earn on a US 10 year treasury, dropped below that which you could earn on a 3 month treasury. A similar inversion happened on the Canadian side as well.

 

Why the panic, and what does this mean?

 

Short version, an inverted yield curve is a very good predictor of recession risk....it's just not good at saying when. Longer version....read on.

 

Credit makes the world go 'round. If lending dries up, economic activity slows down. Banks make money by lending money long, borrowing short and allocating capital accordingly. The money is in the spread. If the two rates compress, the spread compresses as well. If an inversion happens....money can't be made so why lend?

Low long term borrowing rates are typically the bond market signaling that there are economic challenges ahead. Short rates are largely governed by monetary policy decisions. For a really good description Click Here, and even better, share it with your kids. Best learn sooner than later.

 

Sooooooo.....the US Federal Reserve, and the Bank of Canada raised rates quickly and often over the past 20 months......and now we are officially in the upside down.

 

J

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