What Does the Inversion of the Yield Curve Mean for Investors?

Is it time to panic?
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The inversion of the yield curve has dominated financial news with all of the of market volatility.

What Does it Mean?

Essentially what it means is that the yield on short-term bonds (two year) has exceeded those of long term bonds (10 year).

This is particularly important for banks, as the principle behind most loans is to borrow short term at lower interest rates and subsequently make long-term loans to borrowers at higher interest rates. This basic system is impossible under negative spread conditions.

Why Does it Matter?

Maybe most pertinently, it's been a reliable recession predictor.

According to a study from the San Francisco Federal Reserve, an inverted yield curve has preceded all of the nine recessions the U.S. economy has suffered since 1955, making it maybe the most accurate market gauge in the post-war period.

However, experts argue that the inversion is not enough to call for a recession on its own as questions over correlation and causation persist in economic expert discussion.

"An inverted yield curve is a necessary indication of a coming recession but is not sufficient in and of itself," Guggenheim Partners CIO Scott Minerd wrote in a Twitter analysis. "Now we look for a three month slide in leading economic indicators to confirm when recession is near."

To find out what to expect and how to tell if the long avoided recession is indeed encroaching, Real Money's Kevin Curran sat down with Wilmington Trust's Chief Economist Luke Tilley for a rundown of what to expect in 2019.

Kevin Curran is a Real Money reporter.

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