What is the Yield Curve Inversion and Why People Care?

Broken Pie Chart

Welcome to the Broken Pie Chart Podcast Episode 2 Yield Curve Explained. In this episode we will explore what the yield curve is, how the difference between short term interest rates and long-term interest rates can change the shape and look of the yield curve. We also touch on why everyone seems to be talking about potential yield curve inversions and what that means for the economy. Discussion builds around giving some historical perspective on past recessions in the US where we saw a yield curve inversion prior to it although how far before is another story. While many perceive a yield curve inversion as a good predictor of a potential future recession, undoubtably in a post zero interest rate environment enabled by the Federal Reserve Bank in the post 2008 Great Recession world, some may argue that this time is different. We’ll look to cover why it may or may not matter this time.

Key Takeaways:

• What is the yield curve?
• Why is the shape of the yield curve important?
• How many of the past recessions did the yield curve invert?
• What is a yield curve inversion?
• While the US is experiencing a flat yield curve, other countries like Germany see a more normal shape to their yield curve
• Negative interest rates in many European government bonds especially on the short end of the curve
• Short duration bonds seeing highest percentage increase in rates
• The Federal Reserve Bank
• Reasons to stay invested even in the face of a yield curve inversion
• Historical references to time between a yield curve inversion and a recession

Mentioned in this Episode:

Broken Pie Chart Book by Derek Moore https://amzn.to/2MibTSk

Bloomberg.com Country Government Bond Yields https://www.bloomberg.com/markets/rates-bonds

Federal Reserve Bank of St. Louis chart of spread between 10 Year Treasuries and 2 Year Treasuries https://fred.stlouisfed.org/series/T10Y2Y