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Why Should I Care About The Yield Curve?

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The way it is supposed to work is the longer you tie up the money, the higher the rate you earn or pay as compensation for tying up the money. This is the bank model where they lend money out for longer periods at higher rates and borrow money from shorter term savers at lower rates.

If the yield on the long term money is lower than the short term money, then the whole thing becomes unprofitable and banks become reluctant to lend. However, the bigger issue is not how this rate inversion affects banks, but it saying the public believes the near-term economy will be far rockier and riskier than it has been.

Associated with an inverted yield curve is 1) a falling stock market – since investors believe the risk of loss is greater due to economic uncertainty; 2) an increase in the spread between yields on government and corporate bonds – concerns about corporate bond defaults requires increases in yield to justify the extra risk, meaning the value of these bonds fall; and 3) recession – more uncertainty means less spending by both companies and individuals.

Why Should I Care About The Yield Curve?

The way it is supposed to work is the longer you tie up the money, the higher the rate you earn or pay as compensation for tying up the money. This is the bank model where they lend money out for longer periods at higher rates and borrow money from shorter term savers at lower rates. If the yield on the long term money is lower than the short term money, then the whole thing becomes unprofitable and banks become reluctant to lend. However, the bigger issue is not how this rate inversion affects banks, but it saying the public believes the near-term economy will be far rockier and riskier than it has been.

Associated with an inverted yield curve is 1) a falling stock market – since investors believe the risk of loss is greater due to economic uncertainty; 2) an increase in the spread between yields on government and corporate bonds – concerns about corporate bond defaults requires increases in yield to justify the extra risk, meaning the value of these bonds fall; and 3) recession – more uncertainty means less spending by both companies and individuals.

Copyright 2018. Prepared for AMS by Advantage Compendium, Ltd for educational purposes only. Neither AMS nor Advantage Compendium, Ltd. provides investment, tax or legal advice. Information believed accurate, but is not warranted. Any views expressed are not those of AMS. Reproduction is not permitted without written permission. Past performance is not an indication of future results. Information is from sources believed accurate but is not warranted; we do not provide investment, tax or legal advice. Both investments and fixed annuities involve certain risks; a consumer should consult with their advisor or agent. Fixed annuities are not bank instruments and are not insured by FDIC.