Market Beat: About that inverted yield curve
Recently, the yield curve has inverted several times.
Sometimes, an inverted yield can be a signal that a recession is coming. Usually, the inverted yield curve is an early predictor of an approaching economic downturn.
The yield curve is a plot of interest rates based on the maturities of the underlying U.S. Treasury bonds. Normally, the shorter term bonds pay less than the longer term bonds, so the 30 year U.S. Treasury bond has the highest yield.
The yield curve normally slopes upward over time. An inversion of the yield curve is defined by comparing the yield of the two-year U.S. Treasury bond to the 10-year U.S. Treasury bond. If the yield on the two-year bond is greater than the yield on the 10-year bond, then the yield curve is inverted.
Currently, as of Aug. 26, the yield curve is slightly inverted. The two-year U.S. Treasury is yielding 1.551% and the 10-year U.S. Treasury is yielding 1.549%. The yields are very close right now and they had to be carried out to three decimal points to obtain a difference. The short maturity U.S. Treasury bills are paying the most at 2.10%, by comparison the long-term 30-year U.S. Treasury bond is paying 2.04% right now. All the yields for the rest of the maturities are in between the one month bill and the 30-year bond.
While these rates may seem low, there are several countries whose treasury bonds have negative yields. The 10-year bonds of France, Germany, Belgium, Sweden and Japan all have negative yields and there are others as well.
In other words, if you loan your money to one of those countries by buying one of their bonds, you must pay to own it, they don’t pay you. The lowest yielding of those countries is Germany at negative -0.66%.
With the yield curve so flat, many people wonder what the best maturity is to invest in now. That depends on your goals and where interest rates go in the future.
For example, if you bought the 30-year U.S. Treasury today at its current yield of 2.04% and rates go even lower, you’d be happy with that. However, if interest rates were to rise and inflation kicked in, you’d be locked into a long-term bond that drops in value.
One strategy is to stagger maturities for flexibility.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.