10-Year Yield Curve Inverts For The First Time Since 2007

By: Curtis Wayne   3/22/2019

The 10 year bond is very important because it is used by most commercial investments.  When the 10 year bonds prices are less than a short term bonds like the 3-month bonds, this is called an inversion. 

When the 10 year bond inverts, this is usually an indicator that the economy is headed for a recession within the next 6-months.

“… six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal.”

This has not happen since 2007, just before the last major US recession.

An interest rate inversion causes credit to freeze up. 

One of the first that happens is a yield curve inversion causes the high risk assets to be priced lower then low risk assets, which can pop asset bubbles.  

The cost of a high risk assets usually costs a higher prices to finance because it has longer term debts with higher interest rates.  But a yield curve inversion causes high risk asset to cost less than low risk asset.  This creates a major disruption in the entire economy. 

It is no longer acceptable for investors to purchase long-term assets that do not pay more for their added risks.  Investors can no longer make money using short term debts to lend for long term rates.

This also causes profit margins to fall for banks that borrow cash at short-term rates and lend at long-term rates, such as community banks.

These market signals causes credit to freeze up and without credit, the economy heads for a recession.

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