News outlets were buzzing in August of 2019 about the emergence of an inverted yield curve, screaming bloody murder that this was an absolute indicator of impending economic recession.
So what is an inverted yield curve and why is it important?
A yield curve is the term given to the interest rates on specific commodities, generally bonds, that possess similar qualities, but also disparities in maturity dates. US Treasury bonds are an excellent example.
In general, the curve tends to move in an upward slope, being that short-term instruments tend to exhibit lower rates than long-term instruments. The upward curve serves as a simple graph that demonstrates that things are moving in the proper direction, as they should. Which is to say, when financial times are good, we pay a lower interest rate on short-term bonds than long-term ones.
This is sensible, being that a bond is essentially just a loan, so having your money held away for a longer period of time means you can’t touch it (until it reaches its maturity date), because to do so could increase the risks of something going awry.
The reason that rates are lower on short-term bonds is because they are generally paid back sooner. However, a bond’s rate is also impacted by demand, and unlike stocks, the yield rate will decrease as the demand increases.
Investors generally turn to lower-yielding, more dependable bonds when they start getting nervous about where the stock market is heading.
This particular strategy, however, is less than novel. As a result, demand for long-term bonds goes up when investors begin opting for the long-term bonds because of their reputation for higher rates and more stable returns. That is, until the rates on the long-term bonds drop lower than those of the short-term.
That’s what’s known as the inversion.
In effect, when short-term bonds yield lower returns than long-term bonds we find ourselves left with an inverted yield curve.
People often see it as the sign of an oncoming recession because it indicates that the economy has hit rough waters and investors tend to look for shelter in the long-term bond market. And because of the fact that it has preceded the last several US financial crises.
While it is certainly important to be aware of inverted yield inversions when they occur, it’s not always imperative that you take action right away. The longer the curve stays inverted the higher the risk of recession, but we are talking about months or even years in some instances.
Sometimes the curve corrects itself on its own. An anomaly. A fascinating topic for debate. But it’s hard to predict how the curve will be corrected.
As with all duress in the world of finance and markets, portfolio adjustments may need to be made. It’s always best to consult with a trusted financial advisor like Richard Meyer Cayne of Meyer International before doing so, however.
While it’s true that an inverted yield curve could be an indicator of incoming recession, it’s not the only indicator to be considered”, explains Richard Cayne. “While it is certainly important to be aware of inverted yield curves, there are many other factors to take into consideration before stressing out and making potentially drastic decisions about your investments and your portfolio”.
Richard Meyer Cayne of Asia Wealth Group Holdings, the Meyer Group, Meyer Asset Management and Meyer International Ltd has been involved in wealth management planning for decades. Originally born in Montreal Quebec, Canada, he later relocated to Tokyo, Japan for over 15 years and now resides in Bangkok, Thailand. While he runs the Meyer Group and serves as the high credibility CEO of Asia Wealth Group Holdings Ltd, a London, UK Stock Exchange-listed Financial Holdings Company, as well as the Managing Director of the Meyer Group of Companies www.meyerjapan.com. and has additionally been the managing director of multiple organizations that specialize in helping high net worth individuals with succession planning .
Having worked with clients all over the globe with everything from portfolios to bonds to mutual funds to offshore investing to investing in retirement for your golden years, Richard Cayne of Meyer International can help you invest the right way and protect your cash. Richard has been a financial advisor involved in wealth management planning solutions and asset management in Asia for over 25 years and while living in Tokyo, Japan, he assisted many high net-worth Japanese families create innovative international tax and wealth management planning solutions. The financial holding public company of which he is CEO can be seen at Asia Wealth Group Holdings Ltd or the stock exchange link:
https://www.aquis.eu/aquis-stock-exchange/member?securityidaqse=AWLP Asia Wealth Group Holdings Ltd – Richard Cayne Thailand. Meyer Asset Management Ltd has been in the wealth management space since March 2000 and uses fundamental analysis along with modern portfolio theory.
His image worldwide as a professional advisor has been sterling and he maintains a firm command and understanding of all things finance-related.