Yields are Inverted: Why Does it Matter?

How to tell if the yield is inverted? And why it is indicating recession. A quick and simple illustration on:

• Difference between interest rate and yield?

• Why is it important to note yield inversion?

• How to tell when Yields are inverted?

1. Difference between interest rate and yield?

i. Interest rates are a benchmark for borrowers and

ii. Yields are for lenders. For eg. investors to the U.S. government

iii. Both interest rates and yields move in tandem together

2. Why is it important to note yield inversion?

i. For eg. - when the return on a 30-years yield is lower than the 2-year yield, that indicates a？

ii. For lenders or investors – a pessimistic outlook, a reluctance to commit their money to the longer-term bond, they prefer short-term deposits as the market is unclear in the long-term.

iii. For borrowers – most individuals or companies have shorter-term borrowing, for eg a 2 years fixed rate or a bridging loan. When the yields are inverted, suddenly they find them paying more on interest rates repayment.

3. How to tell when Yields are inverted?

i. 2 years and 30 years yield at the start of 2022 was 0.77% and 1.7%

ii. We could see at current 2 years yield at 3.94%, more than that of the 30 years yield

Since interest rates and yields move in tandem, expect the shorter-term lending rates to go higher. This will hurt companies and individuals who have higher leverage items on their books.

Though interest rates should be trending higher both in the short and long-term, and shorter-term faster than the long end, there are some silver linings to note.

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