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ckdarby

Can someone explain what kind of impact this has?

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To my understanding, this is a metric, so it's not quite right to say that it has an "impact". But, from the article:

> Inversion is considered a reliable harbinger of recession in the U.S., within roughly the next 18 months.

Apparently it has predicted the last seven recessions. People are using the expression "self-fulfilling prophecy."

Exactly. Every one looks at the last 10 years of a bull market and says “recession is coming!”.

Many of these people are bidding on these same bonds. So does the inversion signal a coming recession or just the belief of a coming recession?

It may have predicted ten out of the last seven recessions. That is, sometimes the yield curve inverts and the recession doesn't happen. So it's not quite a self-fulfilling prophesy - though it still may be a sometimes-self-fulfilling prophesy...

correct. we can't determine the usefulness of this statistic without a false positive rate.

Lending money for longer term is disadvantaged vs. shorter term so borrowing is impacted. This leads to less stability and in the past has been a fairly good indicator of an upcoming recession.

Past performance is not an indicator of future returns.

When investors buy bonds, specifically US Treasury securities, the relationship between the yield and the time to maturity (2,3,5,7,10,30 years) is generally upward sloping because, as the logic goes, the longer dated securities should have a higher yield because the investor wants to get paid more since they are parting with their money for longer.

https://en.wikipedia.org/wiki/Yield_curve#/media/File:Yield_...

something like that is usually "what's expected".

When we see yield curve inversions, usually beginning with just a small 'kink' on some point in the curve, that means that the yield at a point further out is lower than a shorter dated security. When the yield curve inverts like this, it means that demand for shorter-dated bonds is higher than longer-dated bonds, and because the duration of longer-dated bonds is higher than shorter-dated bonds, when demand falls for longer-dated bonds, those investors will instead buy shorter-dated bonds. Can also mean that the market believes that a recession is coming, so there's a flight to safety out of equities and into shorter-dated treasuries.

That's the gist of it

I think you have the relationship between yield and demand backwards. The yield of a bond and its price are inversely related, so an inverted yield curve (lower yields at longer durations) implies the opposite of what you said: there is higher demand for longer-dated bonds relative to short-dated ones. One way to interpret this is that investors expect poorer asset returns in the short term, so they are willing to lock in a lower yield for a long period of time instead of, for example, taking significant losses in the stock market.

> When the yield curve inverts like this, it means that demand for shorter-dated bonds is higher than longer-dated bonds

That is true for a booming economy, but not for the inverted yield case.

It all comes down to where investors think the Fed is headed when it comes to interest rates.

For a booming economy the Fed puts up rates in an effort to slow growth.

For a lagging economy the Fed cuts the rate in an effort to stimulate growth.

Now consider the investor wanting to invest in bonds hoping for the best possible return.

In a booming economy you would only invest in short term 5 year bonds because chances are future interest rates will be higher than what you are currently getting.

But for a slowing economy it might be better to invest in the 10 year bond, to lock in a long term interest rate only because in the future interest rates may well be lower.

Now consider the supply and demand forces that also come into play.

When the demand is high the price goes up and the yield goes down and when the demand is low the price goes down and the yield goes up.

So when you have large numbers of investors wanting to get out of 5 year bonds (i.e. high selling) and into 10 year bonds (i.e. high buying) you get this inverted yield situation.

Perfect in layman’s terms. The Federal reserve keeps spewing the economy is so strong and nobody in the bond world is buying it, thus locking in the long term rates now (they’ll never admit a recession is coming, or blindly don’t know).

It’s interesting to note the now 60% of bonds are now inverted, it was just 50% a day ago!!!

Even if one was to say this is just one indicator look at Canada -50% inverted and housing bubble currently

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