Hacker News Reader

Comment by sthu11182 | Hacker News Reader

I think inverted yield curve is interesting. In my simplistic understanding, isn't it just a global bet that short term yield is going better than the long term based on investor sentiments. So in essence, when the inversion happens, the smart money is on a downturn/recession. I believe that the 10 year bond and the 2 year bond yield have been close recently feeding fears of an inverted yield curve and recent talk of a downturn.

View on HN

It's the correct results, but it's sort of the backwards interpretation. If you think that interest rates are going to go down a la 2008, there is going to be less demand for short term debt (price goes down, yield goes up), and demand for long term debt goes up (price goes up, yield goes down).

That is to say, if people are willing to take a lower rate for 10 years because they think interest rates won't be nearly as high in say 3 years.

Another aspect to it is that the shorter the maturity, the more the yield is determined by set rates, whereas the longer you go out, the more it's just the auction process of markets setting the yield. This is part of where you get the idea that raising rates too fast can potentially be troublesome, you can end up inverting the curve that way.

It's interesting but the large financial institutions who have teams of people who have spent their live studying yield curves aren't selling off their stocks. So probably they know something we don't and we shouldn't be selling off our stocks. Of course, by the time they have it'll be too late for us but so it goes. Trying to time the market is just too hard for retail investors to do.

Reply on news.ycombinator.com