One of the more reliable warning bells of an economic recession is starting to go off. Here's a look at the 'yield curve' — what it is and why investors in the U.S. pay such close attention to it.
When yields for short-term Treasurys are higher than yields for long-term ones, market watchers call it an “inverted yield curve.” And when that chart has a downward sloping line, Wall Street starts getting nervous.All the talk about charts and yields is tough to digest, but an inversion in the yield curve is considered to be a reliable predictor of a recession.
There’s usually some lag between the two. One rule of thumb says it takes about a year after the three-month Treasury yield tops the 10-year yield before the onset of recession, according to the Federal Reserve Bank of Cleveland.At 0.56%, the three-month yield is still well below the 10-year yield of 2.41%, so no inversion there.But on Tuesday, the two-year Treasury yield briefly topped the 10-year yield for the first time since the summer of 2019.
It could also have real effects on the economy. Banks, for example, make money by borrowing money at short-term rates and lending it out at longer-term rates. When that gap is wide, they make more in profit.
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