Dalton — Last Thursday, July 18, the yield curve (the spread between yields on 10-year and three-month U.S. Treasuries) turned un-inverted for the first time since May 23 and ended a 40-day streak at inverted levels. As a refresher, an inverted yield curve is an interest rate environment in which long-term debt has a lower yield than short-term debt instruments of the same quality. And that is not how it usually works, as long-term rates are supposed to be higher than short-term. An inverted yield curve is considered to be a predictor of an economic recession. When people believe there is an increased risk of a crisis, like a recession, they shift their money into the safest and most liquid investment asset in the world, the 10-year Treasury note. This drives up its price and drives down its yield, and becomes an indicator of negative sentiment regarding the direction and future of the economy and the risks it may face. Even if the sentiment is wrong at the time, how we think dictates how we act, and it can become a self-fulfilling prophecy that bad times are coming. The good news is that the lower rates will drive some business and financial moves in the short term (refinancing your home so that you have more disposable income, or businesses buying new equipment with better financing costs). That pulls demand forward and helps the economy in the short run, but it does sometimes take away from future growth since the expenditures were made then and don’t need to be made later.
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