Yield Curve Inversion Talk Is Wasteful Gossip

Talking about the yield curve is usually a turn-off for most investors.

That’s because the relationship between any two bills, notes, or bonds that make up the yield curve is wonky at best, and only interesting to bond traders who calculate things in basis points.

But, suddenly, everyone’s talking about the yield curve, the inversion of a part of the curve.

Here’s what the fuss is about, how listening to it is a waste of time, and what it means for stocks…

The Shape of a Yield Curve

A yield curve starts at zero on the left side of its axis (though for years, in many countries, government bond yield curves start in negative territory).

Those very low numbers are the interest rate paid on the shortest maturity “bills” available.

As the curve ascends (to the right) in a typically gentle “U” shape, its rise reflects higher interest paid on longer and longer maturity bills, notes, and bonds.

A bill is an instrument that has a maturity of less than a year. Notes have 1 to 10 years’ maturity. And bonds have maturities from 10 years to as much as 100 years.

Most of the time, analysts and the financial press refer to all of them, no matter the actual maturity, as just bonds.

That’s what a yield curve is.

How it’s “read” is important to bond traders, bankers, economists, and now, it seems, it’s important to everyone.

There are regularly watched and traded relationships between different yields on different maturity bonds. The relationship between two different maturities and their different yields is measured in basis points (a basis point is one 100th of 1%) and referred to as “spreads.”

When spreads are narrowing, it means yields on two different maturity bonds are getting closer.

An inversion is when the yield on a longer maturity bond becomes less than the yield on a shorter maturity bond.

What happened last Friday that’s got everyone’s tongue wagging is the U.S. Treasury 10-year bond yield ticked below the U.S. Treasury 3-month bill yield.

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