S&P plunge after yield curve got inverted: Here is everything you need to know about it

Published date: 16/08/2019

The “crazy inverted yield curve” (as Trump describes it) is scaring the market once again. The former US president tweeted this week the following: 

“..Spread is way too much as other countries say THANK YOU to clueless Jay Powell and the Federal Reserve. Germany and many others are playing the game! CRAZY INVERTED YIELD CURVE! We should easily be reaping big Rewards & Gains, but the Fed is holding us back"

But what is actually a yield curve? Why the curve is used as an important economic indicator? Well, EverythingFX is here to explain all you need to know about it. 

Economists use the yield curve to measure the variations in the yields or interest rates among different bonds, therefore, highlighting the current relation between rates and maturity time. The two most used bond rates are the 10Y and the 2Y ones, if the ten-year bond rate falls below the two-year rate, the curve gets inverted. 

Inversion means that investors prefer long-term investments rather than short-term ones, due to economic uncertainty or poor economic status. Therefore, an inverted yield curve has been used to predict previous recessions (But typically those inversions comes 7 or 8 months prior to the actual meltdown). According to many analysts, there has been a yield curve inversion before the last 7 recessions in the US.  

This week, the curve triggered the panic in Wall Street, as the 10Y-2Y crossed for the first time since 2005. The announcement of the crossover spread quickly, with the Dow falling over 800 points in a single day. Deutsche Bank hitting a new 52-week low, 15 trillion USD going negative in yield bonds, Brexit, Trade War, Central Banks turning significantly dovish…With everything that is going on in the international panorama, it is not a surprise that the fear is strongly flooding the stock market.



Leave a Comment