Inverted Yield Curve in a nutshell
Last week, I started reading a book on real-estate investments called “Complete Real-Estate Investing Book” by David Crook. In the chapter on mortgages, the author stated that no company would give a lower rate than Treasury bonds. Per my research, buying Treasury bonds is a way to loan money to the government for a given period of time, called the term. Normally the long-term bonds (10–30 years) offer higher interest rates than short-term ones (1–5 years). It makes sense, forfeiting access to your money for 30 years is a big commitment, and therefore warrants a higher pay-off. The government always pays back its loans, which makes bonds a low-risk investment, and thus a low reward.
Many prefer to invest in the stock market instead, which comes with greater reward and greater risk. Stock market investors try to mitigate that risk. When investors lose confidence in the stock market, many sell their stocks to buy long-term Treasury bonds to avoid losses during a potential market crash. These bonds see their interest rates drop due to high demand. The drop can be so significant that the short-term bonds become more profitable than long-term ones. This phenomenon is called the inversion of the yield curve. So far this happened every time before all economic recessions.
The money-making game fascinates me.
