, 2022-05-18 16:00:00,
- What is the yield curve?
- What does it mean when it’s inverted?
- What is yield curve control (YCC)?
- And how does the eurodollar fit into all this?
As Lyn Alden explains in this thread: “…the 10-2 curve is saying, ‘we’re probably getting close to a possible recession, but not confirmed, and probably many months away…’”
Let’s break that down a bit, shall we?
What Is The Yield Curve?
First of all, what exactly is the yield curve that everyone seems to be talking about lately, and how is it tied to inflation, the Federal Reserve Board and possible recession?
The yield curve is basically a chart plotting all the current nominal (not including inflation) rates of each government-issued bond. Maturity is the term for a bond, and yield is the annual interest rate that a bond will pay the buyer.
A normal yield curve (this one from 2018) chart will typically look like this:
The Fed sets what is called the federal funds rate, and this is the shortest interest rate you can get a quote on, as it is the rate (annualized) that the Fed suggests commercial banks borrow and lend their excess reserves to each other overnight. This rate is the benchmark that all other rates are priced from (or so, in theory).
As you can see, in a normal economic environment, the shorter the maturity of the bond, the lower the yield. This makes perfect sense in that, the shorter the time committed to lending money to someone, the less interest you would charge them for that agreed lockup period (term). So, how does this tell us anything about future economic downturns or possible recessions?
That’s where yield curve inversion comes into play and what we will tackle next.
What Does It Mean When It’s…
To read the original article, go to Click here