Discussing the Yield Curve Inversion and Why It’s Not As Bad As It Seems
April 5, 2022
Welcome to Wealth Enhancement & Preservation’s Market Minute, where we get to update you on everything that happened in the financial markets this past week. My name is Armand Glassman, and I am a partner at Wealth E&P and work as the Chief Portfolio Manager and a Certified Financial Planner™.
All three indices finished Q1 2022 down, and this is the first time that's happened since Q1 2020 when we had the pandemic panic begin. Today, I want to talk about yield curve inversions and why you're hearing about it in the news. A yield curve is simply a plot of the yields you can expect from a bond over time. The yield of treasury bonds is of particular interest to investors.
When the yields one can expect from a shorter-term bond (like the 2-year) are higher than the yield you can expect from a longer-term bond (like the 10-year), a yield curve inversion occurs. Typically, bonds with longer maturities pay higher yields to reward investors for tying their money up for longer time periods.
My first chart shows the 2-year and 10-year treasury yields inverted last week, and they remain inverted; this situation is unusual and is often seen as an indication of a coming recession. It's an inexact indicator at best.
As you can see from my second chart, the 2-year and 10-year treasury yields have inverted previously four times, and it took an average of 21 months before any recession began. In the meantime, equity markets rallied on average for 17 months and were up 28.8%, as you can see on the chart.
Yield curve inversions, though unusual, are not a precise indicator of economic downturns. They are also not a useful timing tool for equity investors.
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