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Can someone explain this in dumb person language? All I get is that the yield that bonds give is below zero, meaning you lose money holding them? And bonds are

Can someone explain this in dumb person language? All I get is that the yield that bonds give is below zero, meaning you lose money holding them? And bonds are buying debt on faith the issuer will pay, and as the issuer pays, you get dividends. And I think the interest rate is inversely proportional to the amount the bonds pay or something like that? Just explain in simple language. :)

ceejayoz 8y ago
It's a potential warning sign of a coming recession: https://en.wikipedia.org/wiki/Yield_curve#Relationship_to_the_business_cycle https://en.wikipedia.org/wiki/Yield_curve#Relationship_to_th...
dawhizkid 8y ago
No - what happened is the yield on the 5 year treasury dropped below the 3 year one.
Bajeezus 8y ago
It's significant because an inverted yield curve is a historical indicator of an impending recession. https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html https://www.nytimes.com/2018/06/25/business/what-is-yield-cu...
bunderbunder 8y ago
Not quite that. The yield for a 5-year note is less than the yield for a 3-year note. More generally, a yield curve inversion is when the interest rate you earn on short-term debt ends up higher than that of long-term debt of the same quality. I don't think the issue is that the inversion causes the recession. It's more an indicator of pessimism in the market. It implies that investors think that interest rates are going to get worse, so they look to buy more longer-term bonds in order to try and lock in current yields for a longer period of time. That increases demand for those assets, which drives down their price^H^H^H^H^H yields.
- deleted 8y ago
  [deleted]
- throwaway4job 8y ago
  Not quite that. Bond prices go down when interest rates go up. As such, an investor who thinks that interest rates will go _up_ will reallocate from long-term bonds to short-term bonds, rather than the opposite as you stated.
- cloakandswagger 8y ago
  > That increases demand for those assets, which drives down their price. I'm not an economist but this seems wrong
  - bunderbunder 8y ago
    Haha, gotcha. edited.
  - vasilipupkin 8y ago
    yes, OP meant drives up the price and drives down yields
  - halotrope 8y ago
    Actually it does not drive down the price but the yield. When the price goes up the fixed payment is a lower fraction of the price of the bond. Hence the return goes down. https://www.investopedia.com/terms/b/bond-yield.asp https://www.investopedia.com/terms/b/bond-yield.asp
  - cbdumas 8y ago
    He made it most of the way there. Increasing demand drives UP prices, which drives DOWN yield.
  - nwah1 8y ago
    That commenter should've said the yield is driven down. The US government wants to borrow at the cheapest rate of interest. If more people want to lend to them, they have more options and can pick the cheapest option.
bengrunfeld 8y ago
Sorry for the copy pasta, but they say it better than I do. "Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed." https://www.investopedia.com/terms/i/invertedyieldcurve.asp https://www.investopedia.com/terms/i/invertedyieldcurve.asp
keeganjw 8y ago
If my understanding it correct, I'm pretty sure it means the yields of short-term investments are better than long-term investments with the implication that investors feel like the economy is fine now but won't be in the not to distant future. In short, they think there will be a recession so they want to make money now while the gettin's good.
gibybo 8y ago
Actually they still pay a positive amount (about 2.8%/year). What's significant is that now the 3 year pays slightly more than the 5 year (2.84% vs 2.83%). Usually longer term treasuries pay more because the buyer assumes more risk to have their money locked in to a specific rate for a longer term. However, when the market expects that maybe interest rates will be falling in the near future (like in a recession), it can prefer to lock in the current rates for a longer term. When markets expect recessions, people tend to buy long term treasuries over short term treasuries which causes the yield of long term treasuries to go down and the yield of short term treasuries to go up.
starbugs 8y ago
Here's a YouTube video illustrating it quite nicely IMO: https://www.youtube.com/watch?v=tZwChe0WvO4 https://www.youtube.com/watch?v=tZwChe0WvO4
n1000 8y ago
In the article there is actually a link hidden that provides just that info > Click here for a QuickTake on the yield curve https://www.bloomberg.com/news/articles/2017-12-11/the-yield-curve-is-flatter-remind-me-why-i-care-quicktake-q-a https://www.bloomberg.com/news/articles/2017-12-11/the-yield...
- madamelic 8y ago
  Oh awesome, thanks!
ellisv 8y ago
Treasuries (i.e. bonds) are issued for different terms, such as 3-year and 5-year terms. Typically longer term treasuries have higher yields because you're loaning your money for a longer period. The Yield Curve™ is the difference between the yields of two treasuries -- in this article it is the 5-year Treasury note minus the 3-year Treasury note. When this difference is negative that means the 5-year note has a lower yield than the 3-year note. Investors typically want the highest yield possible, so they'll invest in the 3-year note rather than the 5-year note. A negative spread (difference) can indicate that investors are more confident about the short-term than the long-term. Note there isn't really a single "Yield Curve". You can take the spread between any two terms of a Treasury note -- e.g. the 30-year and 10-year or the 10-year and 2-year notes. The Federal Reserve provides a spread for the 10-year minus 2-year: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y
- twic 8y ago
  A yield curve typically means taking not just two instruments, but as many as you can get, so there really is just one yield curve for any given kind of instrument. Although there is enough variety in the details of government bonds that you could argue there is more than one there. The proposition that there is a single yield curve is more obviously true for things like interest rate swaps.
debt 8y ago
It means institutions aren't betting on the long term growth of the economy and instead are tryna capture short-term gains.
mathattack 8y ago
For whatever reason, if people are optimistic about the market, the yields are higher long term versus short. (You need to get paid more interest to hold a 10 year bond than 2 years because you assume the rates go up) The general reason people think rates will go down in the future is if a recession is coming, and the govt will lower them. In this case the rates may high for 2 years, but lower long term. (The 10 year rate is just a weighted average of interim rates)
- taysic 8y ago
  Why would rates go up in an economy that is getting better? Is it only because the Fed would increase rates in response to the improvement? In a free market, I imagine they would go down because people would trust the government's ability to pay back their bills and thus bonds would be more in demand?
  - mathattack 8y ago
    It’s not credit risk of the govt. It’s the govt raising rates to slow down inflation. (In a downturn, prices go down, so rates can be lowered without an inflation risk)
    - deleted 8y ago
      [deleted]
Havoc 8y ago
chadash wrote a nice explanation further up in the thread

ceejayoz 8y ago

It's a potential warning sign of a coming recession: https://en.wikipedia.org/wiki/Yield_curve#Relationship_to_the_business_cycle https://en.wikipedia.org/wiki/Yield_curve#Relationship_to_th...

dawhizkid 8y ago

No - what happened is the yield on the 5 year treasury dropped below the 3 year one.

Bajeezus 8y ago

It's significant because an inverted yield curve is a historical indicator of an impending recession. https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html https://www.nytimes.com/2018/06/25/business/what-is-yield-cu...

bunderbunder 8y ago

Not quite that. The yield for a 5-year note is less than the yield for a 3-year note. More generally, a yield curve inversion is when the interest rate you earn on short-term debt ends up higher than that of long-term debt of the same quality. I don't think the issue is that the inversion causes the recession. It's more an indicator of pessimism in the market. It implies that investors think that interest rates are going to get worse, so they look to buy more longer-term bonds in order to try and lock in current yields for a longer period of time. That increases demand for those assets, which drives down their price^H^H^H^H^H yields.

deleted 8y ago
[deleted]
throwaway4job 8y ago
Not quite that. Bond prices go down when interest rates go up. As such, an investor who thinks that interest rates will go _up_ will reallocate from long-term bonds to short-term bonds, rather than the opposite as you stated.
cloakandswagger 8y ago
> That increases demand for those assets, which drives down their price. I'm not an economist but this seems wrong
- bunderbunder 8y ago
  Haha, gotcha. edited.
- vasilipupkin 8y ago
  yes, OP meant drives up the price and drives down yields
- halotrope 8y ago
  Actually it does not drive down the price but the yield. When the price goes up the fixed payment is a lower fraction of the price of the bond. Hence the return goes down. https://www.investopedia.com/terms/b/bond-yield.asp https://www.investopedia.com/terms/b/bond-yield.asp
- cbdumas 8y ago
  He made it most of the way there. Increasing demand drives UP prices, which drives DOWN yield.
- nwah1 8y ago
  That commenter should've said the yield is driven down. The US government wants to borrow at the cheapest rate of interest. If more people want to lend to them, they have more options and can pick the cheapest option.

bengrunfeld 8y ago

Sorry for the copy pasta, but they say it better than I do. "Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed." https://www.investopedia.com/terms/i/invertedyieldcurve.asp https://www.investopedia.com/terms/i/invertedyieldcurve.asp

keeganjw 8y ago

If my understanding it correct, I'm pretty sure it means the yields of short-term investments are better than long-term investments with the implication that investors feel like the economy is fine now but won't be in the not to distant future. In short, they think there will be a recession so they want to make money now while the gettin's good.

gibybo 8y ago

Actually they still pay a positive amount (about 2.8%/year). What's significant is that now the 3 year pays slightly more than the 5 year (2.84% vs 2.83%). Usually longer term treasuries pay more because the buyer assumes more risk to have their money locked in to a specific rate for a longer term. However, when the market expects that maybe interest rates will be falling in the near future (like in a recession), it can prefer to lock in the current rates for a longer term. When markets expect recessions, people tend to buy long term treasuries over short term treasuries which causes the yield of long term treasuries to go down and the yield of short term treasuries to go up.

starbugs 8y ago

Here's a YouTube video illustrating it quite nicely IMO: https://www.youtube.com/watch?v=tZwChe0WvO4 https://www.youtube.com/watch?v=tZwChe0WvO4

n1000 8y ago

In the article there is actually a link hidden that provides just that info > Click here for a QuickTake on the yield curve https://www.bloomberg.com/news/articles/2017-12-11/the-yield-curve-is-flatter-remind-me-why-i-care-quicktake-q-a https://www.bloomberg.com/news/articles/2017-12-11/the-yield...

madamelic 8y ago
Oh awesome, thanks!

ellisv 8y ago

Treasuries (i.e. bonds) are issued for different terms, such as 3-year and 5-year terms. Typically longer term treasuries have higher yields because you're loaning your money for a longer period. The Yield Curve™ is the difference between the yields of two treasuries -- in this article it is the 5-year Treasury note minus the 3-year Treasury note. When this difference is negative that means the 5-year note has a lower yield than the 3-year note. Investors typically want the highest yield possible, so they'll invest in the 3-year note rather than the 5-year note. A negative spread (difference) can indicate that investors are more confident about the short-term than the long-term. Note there isn't really a single "Yield Curve". You can take the spread between any two terms of a Treasury note -- e.g. the 30-year and 10-year or the 10-year and 2-year notes. The Federal Reserve provides a spread for the 10-year minus 2-year: https://fred.stlouisfed.org/series/T10Y2Y https://fred.stlouisfed.org/series/T10Y2Y

twic 8y ago
A yield curve typically means taking not just two instruments, but as many as you can get, so there really is just one yield curve for any given kind of instrument. Although there is enough variety in the details of government bonds that you could argue there is more than one there. The proposition that there is a single yield curve is more obviously true for things like interest rate swaps.

debt 8y ago

It means institutions aren't betting on the long term growth of the economy and instead are tryna capture short-term gains.

mathattack 8y ago

For whatever reason, if people are optimistic about the market, the yields are higher long term versus short. (You need to get paid more interest to hold a 10 year bond than 2 years because you assume the rates go up) The general reason people think rates will go down in the future is if a recession is coming, and the govt will lower them. In this case the rates may high for 2 years, but lower long term. (The 10 year rate is just a weighted average of interim rates)

taysic 8y ago
Why would rates go up in an economy that is getting better? Is it only because the Fed would increase rates in response to the improvement? In a free market, I imagine they would go down because people would trust the government's ability to pay back their bills and thus bonds would be more in demand?
- mathattack 8y ago
  It’s not credit risk of the govt. It’s the govt raising rates to slow down inflation. (In a downturn, prices go down, so rates can be lowered without an inflation risk)
  - deleted 8y ago
    [deleted]

Havoc 8y ago

chadash wrote a nice explanation further up in the thread