The yield curve has inverted for a second time. | Source: Drew Angerer/Getty Images/AFP
By CCN Markets: On Wednesday, the bond market once again experienced an inverted yield curve. The behavior in the bond markets has been interesting as of late, and another instance of this yield curve inversion demands that we take a closer look at what’s going on.
First, let’s review what an inverted yield curve implies.
Short Term Bonds vs Long Term Bonds
Normally, short-term bonds pay less interest than long-term bonds. That’s because the economic situation for two-year Treasury note is less likely to change in the short term of two-years than it will over a longer term of 10-years. Therefore, it carries less economic risk.
It stands to reason that interest rates on the two-year Treasury note will generally be yielding less interest than that of the 10-year Treasury note.
From time to time, however, we see a weird thing happen. Interest rates on the 10-year bond yield are less than interest rates on the two-year bond.
Why does that happen?
Why Rates Fall
Declining interest rates indicate a possible recession.
Interest rates decline during this period because the Federal Reserve wants to encourage people to borrow money to invest into the economy, so it lowers interest rates to encourage this behavior.
Except people who are seeking regular fixed income don’t like having interest rates decline.
So they shift into buying longer-term bonds, such as the 10-year Treasury note. Interest rates are negatively correlated to price. So as demand for the 10-year bonds rise as people buy more and more of those bonds,