4 ms·

Simple explanation of what this means. Here are current yields on Treasury Bonds (expressed as an annualized rate)[0]: 1 Mo - 2.47 2 Mo - 2.47 3 Mo - 2.46 6

Simple explanation of what this means. Here are current yields on Treasury Bonds (expressed as an annualized rate)[0]: 1 Mo - 2.47 2 Mo - 2.47 3 Mo - 2.46 6 Mo - 2.49 1 Yr - 2.41 2 Yr - 2.26 3 Yr - 2.19 5 Yr - 2.21 7 Yr - 2.32 10 Yr - 2.43 20 Yr - 2.68 30 Yr - 2.87 In normal times, rates are higher for longer terms. This makes sense: the longer I tie up my money, the higher interest rate I'm going to want. However, right now, the rates are mostly inverted. For example, I'd get a higher rate on a bond with a lockup period of 6 months than I would on a bond with a lockup period of 10 years. Typically, this sort of thing precedes a recession. Bond market investors think that a recession is coming, so they are willing to pay for longer term bonds on the assumption that rates on these will go down in the future when the federal reserve lowers rates (to stimulate the economy) and when people flee the stock market generally in order to avoid risk. [0] Source https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...

iambateman 8y ago
Thanks for this. Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond? It seems like an inversion would result in near-zero long-term bond purchases.
- alehul 8y ago
  If an investor believes that a recession is coming soon, then they'd be willing to receive a lower interest rate in exchange for a secure 10-year return. The fact that investors are purchasing long-term bonds at these inverted rates is exactly what indicates a possible recession. The lower price is a function of their willingness.
- deleted 8y ago
  [deleted]
- levthedev 8y ago
  Sure, if you think that rates are going to drop next year, and would like to secure the 10 year rate instead of risking that. Another way to express it: if today, you believe the average rate over the next 10 years will be lower than the current 10 year rate, you should buy the 10 year treasury. This is a tiny bit simplistic as it ignore liquidity/volatility differences between buying a 10 year treasury and buying 20 6-month treasuries or 10 1 year treasuries.
- CPLX 8y ago
  Yes. For precisely the same reason you would choose a fixed rate mortgage over a variable rate mortgage.
- nickburlett 8y ago
  NPR's "The Indicator" podcast has had a couple of good (and short) episodes about inverted yield curves. I think this is the first of them: https://www.npr.org/sections/money/2018/01/12/577710151/the-recession-predictor https://www.npr.org/sections/money/2018/01/12/577710151/the-... I highly recommend The Indicator podcast.
- deleted 8y ago
  [deleted]
- cesarb 8y ago
  With a 10-year bond, the investor receives that interest rate over the whole 10 years. With a 6-month bond, the investor receives that interest rate only over these 6 months, and then has to find another bond to buy. If all available bonds then have a lower interest rate, the investor would have received more for the 10-year bond. (What might be confusing at first is that interest rates are usually "annualized", that is, presented as if they were for a single whole year. You won't actually receive 2.49% of what you paid for the 6-month bond; you'll receive something like 1.24%, and you have to invest again for another 6 months to reach that 2.49%. If that investment is no longer available, you might not be able to do that.)
  - stoddler 8y ago
    One can invest it again in a 6 month bond with the yield curve inverted further. The decrease in rates would happen over a longer term than 6 months. And also if the rates have decreased the prices would have increased for the bond that is held.
- deleted 8y ago
  [deleted]
- throw0101a 8y ago
  > Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond? Well, what do you do with the cash once the six month bond matures? IF a recession comes along, you'll be looking for a place for your cash in a financial environment that may be quite bad. People go to 10Y bonds because any financial storms would have likely blown over by then. And keep in mind that the average time between inversion and a recession is 311 days. [1] And then on top of that you'll want some recovery time. So you're looking at least 2 years before things hypothetically blow over. And US bonds only come in certain increments: 2Y may be overly optimistic, and the next jump after that is 5Y (then 10Y). 10Y may also be more liquid, so people just mostly skip 5Y. [1] https://seekingalpha.com/article/4250934 https://seekingalpha.com/article/4250934
- drc500free 8y ago
  Because they think it will work better over 10 years than sequentially buying two 6-month bonds, a 2-year bond, and a 7-year bond based on whatever the market rates are as each one expires.
JamesBarney 8y ago
Well the bond market thinks that the interest rates will be lower in the future than right now. And one reason that interest rates could drop is a recession.

iambateman 8y ago

Thanks for this. Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond? It seems like an inversion would result in near-zero long-term bond purchases.

alehul 8y ago
If an investor believes that a recession is coming soon, then they'd be willing to receive a lower interest rate in exchange for a secure 10-year return. The fact that investors are purchasing long-term bonds at these inverted rates is exactly what indicates a possible recession. The lower price is a function of their willingness.
deleted 8y ago
[deleted]
levthedev 8y ago
Sure, if you think that rates are going to drop next year, and would like to secure the 10 year rate instead of risking that. Another way to express it: if today, you believe the average rate over the next 10 years will be lower than the current 10 year rate, you should buy the 10 year treasury. This is a tiny bit simplistic as it ignore liquidity/volatility differences between buying a 10 year treasury and buying 20 6-month treasuries or 10 1 year treasuries.
CPLX 8y ago
Yes. For precisely the same reason you would choose a fixed rate mortgage over a variable rate mortgage.
nickburlett 8y ago
NPR's "The Indicator" podcast has had a couple of good (and short) episodes about inverted yield curves. I think this is the first of them: https://www.npr.org/sections/money/2018/01/12/577710151/the-recession-predictor https://www.npr.org/sections/money/2018/01/12/577710151/the-... I highly recommend The Indicator podcast.
deleted 8y ago
[deleted]
cesarb 8y ago
With a 10-year bond, the investor receives that interest rate over the whole 10 years. With a 6-month bond, the investor receives that interest rate only over these 6 months, and then has to find another bond to buy. If all available bonds then have a lower interest rate, the investor would have received more for the 10-year bond. (What might be confusing at first is that interest rates are usually "annualized", that is, presented as if they were for a single whole year. You won't actually receive 2.49% of what you paid for the 6-month bond; you'll receive something like 1.24%, and you have to invest again for another 6 months to reach that 2.49%. If that investment is no longer available, you might not be able to do that.)
- stoddler 8y ago
  One can invest it again in a 6 month bond with the yield curve inverted further. The decrease in rates would happen over a longer term than 6 months. And also if the rates have decreased the prices would have increased for the bond that is held.
deleted 8y ago
[deleted]
throw0101a 8y ago
> Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond? Well, what do you do with the cash once the six month bond matures? IF a recession comes along, you'll be looking for a place for your cash in a financial environment that may be quite bad. People go to 10Y bonds because any financial storms would have likely blown over by then. And keep in mind that the average time between inversion and a recession is 311 days. [1] And then on top of that you'll want some recovery time. So you're looking at least 2 years before things hypothetically blow over. And US bonds only come in certain increments: 2Y may be overly optimistic, and the next jump after that is 5Y (then 10Y). 10Y may also be more liquid, so people just mostly skip 5Y. [1] https://seekingalpha.com/article/4250934 https://seekingalpha.com/article/4250934
drc500free 8y ago
Because they think it will work better over 10 years than sequentially buying two 6-month bonds, a 2-year bond, and a 7-year bond based on whatever the market rates are as each one expires.

JamesBarney 8y ago

Well the bond market thinks that the interest rates will be lower in the future than right now. And one reason that interest rates could drop is a recession.