What is the first inverted yield curve in 12 years? Is the U.S. economy in trouble?
Hello, this is Gezan.
On the 14th last week, in America,
the long-term/short-term interest rate inversion (inverted yield curve)
occurred for the first time in about 12 years.
Along with that, the Dow Jones dropped for the largest decline of the year….
“With the yield curve inversion, won't the economy deteriorate?”
Such voices were heard from various places.
“Huh, wait a minute. What is this yield inversion in the first place
and why would it cause an economic downturn?”
I think there are people who are wondering about that.
So today, I will introduce the topic of inversion as simply and clearly as possible.
Also, regarding the possibility of an economic downturn,
as a trader, what kind of stance should we take?
I’ll also discuss that.
As I always say,
a trader’s job is to make profits,
not to become an expert in economics.
I assure you,becoming knowledgeable about economics
and making profits from tradingare two different things.
If you look at Forbes rankings,
you’ll see economists aren’t appearing.
That’s obvious, isn’t it?
Therefore, even if you learn more about “yield inversion,”
it doesn’t directly translate into profits.
However, if you’re interested in trading,
it wouldn’t hurt to know.
Understanding the news and being able to discuss it
is simply enjoyable, right?
So, with a relaxed mindset,
and without any pressure,
I hope you’ll read this.
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Inverted yield curve = Recession?
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First, let’s start with interest rates.
There are long-term and short-term interest rates, which you have probably heard somewhere.
According to Wikipedia,
long-term yields are
“the interest rates on financial assets or liabilities with long repayment periods or maturities.”
(Wikipedia
“https://ja.wikipedia.org/wiki/長期金利から引用）
Meanwhile, short-term yields are
“the interest rates on financial assets or liabilities with short maturities.”
(Wikipedia
“https://ja.wikipedia.org/wiki/短期金利より引用）
Long-term yields tend to reflect investor sentiment,
while short-term yields are influenced by
central bank policy,
and therefore long-term yields usuallyare higher than short-term yields,
but why is that?。
For example, imagine you buy US Treasury bondsto hold them for a long period.
Obviously, the longer the period, the longer it takes to recover the funds,
and the longer the period, the more exposed you are to price fluctuations.
So,
“Since I’m holding them for a long time, raise the interest rate for me, please.”
That’s what people would naturally think.
Therefore, generally long-term yields tend to
be higher than short-term yields.
However, sometimes long-term and short-term yields
invert (reverse).
This is the phenomenon called “inversion.”
So, when does inversion occur?
For example, when many market participants
are pessimistic about future economy.
When people think the economy will slow down,
they fear and seek to reduce risk.
And they look for safer assets.
Government bonds are such safe assets.
This time too,
negative investor sentiment about global events spread,
and funds flowed into US Treasuries.
When bonds are bought, bond prices rise accordingly.
As a result, long-term yields fall and
they even dropped below short-term yields.
By the way, one question may arise here.
“Why does the popularity of government bonds lower yields?”
—
If you’re curious,put yourself in the government's shoes
and imagine when you want to borrow money.
If you say,“I want to borrow money!!”
and only one person offers to lend you money,
you would have to look for more lenders from others,
so what options do you have?
Raise the interest rate, right?
If interest rates rise,
more lenders will come forward.
On the other hand, suppose 10 people say,
“I want to lend money,”
and 10 people exist,
then even if only one person appears,
the interest rate can stay low.
In other words,
when government bond demand is high,
there are plenty of people who say,
“I can lend money,”
so interest rates fall naturally.
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Don’t lose sight of the essence
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The occurrence of the “inverted yield curve”
indicates a deterioration in investor sentiment,
which means you understand it as such.
Now, in reality, after inversion occurs,
will the economy deteriorate?
Looking back,
when inversion occurred in the US,
the US entered a recessionary period.
That is why, this time as well, the inversion is viewed with concern.
However, do not misunderstand.
Inversion does not necessarily mean a recession will occur.
This time,
the market’s worry that
“the economy might deteriorate”
and the resulting anxiety have caused the inversion and fears to spread.
In fact, that has also reflected in stock prices.
But, please avoid getting swept up in herd mentality.
While many market participants are anxious,
it would be a waste for you to become anxious as well.
What’s important is not how others are thinking,
but whether the US economy is truly in a dire situation.
How about you?
Do you really think the US economy is
in a terrible state?
If you’re reading media reports and
feeling anxious,please, by all means,
consider the US economy for yourself.
In such times,many people tend to
look to analysts for guidance, but
if you want to do so,
you should only参考 the opinions of analysts who truly profit from investing.
There are many such analysts worldwide, but...
Thank you for watching until the end today as well.
Sincerely,
Keizo Shimo,
