Yield Curve Inversion 🔴🔴

On Wednesday, September 21st, Fed hikes interest rates by 75 basis points for the third consecutive time in the last six months.

❓How Federal reserve rate hike affect bond yields❓

Market interest rates and bond prices typically move in opposite directions, which means any increase in the interest rates causes bond prices to fall. There’s also an inverse relationship between bond prices and yields, bond yields rise as bond value drops.

Now that the bonds are available in the market at a cheaper rate and are offering better interest rates than they did previously coupled with the uncertain situation in the market, will make people switch from risky assets like equities to safer “risk-free” assets like government securities (bonds). This phenomenon is also known as portfolio shift.

Fed chairman Jerome Powell has mentioned previously that there would be more interest rate hikes taking place and the government is taking this aggressive strategy to curtail inflation. Considering this the markets have witnessed a huge selloff in equities and moved to safer government securities.

❓What is this Inversion now❓

Post the latest interest rate hike, 2-year Treasury yield (Bond yield) stands at 4.29% (Short term bond yield) and 10-year Treasury yield stands at 3.93% (Long term bond yield). When short-term bond yields are higher than long-term bonds it is known as yield curve inversion and it is viewed as a warning sign for a future recession. The inverted curve has accurately predicted the ten most recent recessions.

That said Inverted curve alone doesn’t paint the complete picture regarding the recession. What do you think about inverted yield curves and the current global economic situation?