Yield Curve May Not Indicate a Recession -- What It Means for Stock Investors

Don't freak out if there is a yield curve inversion soon. Only freak out if the inversion stays for a while.
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An inverted yield curve very often means there's a recession coming within a fairly short period of time. 

But that may not necessarily be so right now.

First, know how the yield curve behaves. Any investor would want a higher rate of interest on a 10 year bond than a 2 year bond, to compensate for the risk taken by parting from his or her principal for a longer time period. So when the 10 year yield is lower than the 2 year, that means demand for the 10 year drove the price so high -- and yields fall when prices rise -- that the 10 year yield dropped below the 2 year. This indicates investors are concerned the economy will see a recession soon, so they flock to a longer-term safer asset. They're willing to accept lower interest on a longer-term asset because use they think the economy will fall. 

But within the next few months, a yield curve inversion could tell us more about Europe than it does about the U.S. The German 10 year Bond currently yields 2.15%, lower than the U.S. 10 year treasury bond of 2.91%. German bond investors may then flock into U.S. 10 year's for the better yield, a wave of demand that would lift the price of the U.S. 10 year, driving the yield down. This could drive the 10 year yield below the U.S. 2 year yield of 2.7%. 

None of this necessarily signifies a recession. 

For stock investors, if that potential inversion stays in place for a long time, that may mean there is indeed a growing fear of a recession, which would make stocks extremely risky.