Everyone's Watching Yield Curves

December 8, 2017

 

Well, maybe not everyone is watching yield curves. But the smart money is keeping an eye out for a yield curve inversion. What’s that? It’s when interest rates on long-term investments, like 10-year treasuries or bonds, are paying a lower rate than the short-term ones. Why does it matter? Well, historically, when long-term rates fall below short-term rates, investors are signaling an expectation of economic trouble ahead. They start to lock in lower interest rates for longer periods of time. The yield curve is not inverted yet, but it is flattening and getting closer to the point where it signals an economic downturn.

 

According to this article, and lots of research, once an inversion forms, it’s almost guaranteed to predict a coming recession. Economic downturns are not good for anyone. But, on a positive note, lower interest rates generally improve the affordability of real estate investments. So, if you're looking for a house, you might get more for your money.  Whether there will be an appetite for real estate in a downturn is a question left up to the buyers.  Investors should keep an eye on this chart which shows the yield curve over the last 3 months. You can see the curve flattening. It may be a blip. The curve may get steeper again. Or it might invert.

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