And I think the interest rate is inversely proportional to the amount the bonds pay or something like that?
Just explain in simple language. :)
More generally, a yield curve inversion is when the interest rate you earn on short-term debt ends up higher than that of long-term debt of the same quality.
I don't think the issue is that the inversion causes the recession. It's more an indicator of pessimism in the market. It implies that investors think that interest rates are going to get worse, so they look to buy more longer-term bonds in order to try and lock in current yields for a longer period of time. That increases demand for those assets, which drives down their price^H^H^H^H^H yields.
Bond prices go down when interest rates go up. As such, an investor who thinks that interest rates will go _up_ will reallocate from long-term bonds to short-term bonds, rather than the opposite as you stated.
I'm not an economist but this seems wrong
This is categorically not true. If it were then Congress would pass legislation ordering the Fed to buy securities from the Treasury at whatever rate it liked (or abolish the Fed altogether and just directly spend money into existence). Congress in fact wants to provide savings vehicles, it's not actually necessary for Congress to borrow to fund the federal government. Sure it's necessary under current law but Congress by definition can change that law. That it chooses not to is an expression of a preference.
Buying a bond means you are lending money now, in return for more money later. The amount you get later is made up of the price you pay now plus the interest, ie the yield. So if the yield goes up, the price goes down. (You don't have to pay as much for a bond when the yield goes up).
Or is it simply about interest rates, I guess, since higher interest rates cool the market and lower interest rates warm the market. So investors are thinking a recession is coming and the Fed will need to lower interest rates to stimulate.
But, in a recession, the stock market tends to nose dive, which prompts a lot of people to flee to fixed-income securities because they're viewed as being safer. Which would also drive down yields.
Not always:
https://en.m.wikipedia.org/wiki/United_States_federal_govern...
"Market consequences ... U.S. treasury bonds, which had been the subject of the downgrade, actually rose in price and the dollar gained in value against the Euro and the British pound, indicating a general flight to safe assets amid concerns about a European debt crisis.[31]"
Basically, no one believes rating agencies with respect to the US paying its debts - but they do believe that if the US government is in chaos, it will be bad for the world economy.
One should also remember that US bonds are denominated in US dollars, which the US government can print. Also, if you're comparing to "cash" you probably mean "US dollars" which are backed by the "full faith and credit" of...the US government.
However, when the market expects that maybe interest rates will be falling in the near future (like in a recession), it can prefer to lock in the current rates for a longer term. When markets expect recessions, people tend to buy long term treasuries over short term treasuries which causes the yield of long term treasuries to go down and the yield of short term treasuries to go up.
> Click here for a QuickTake on the yield curve
https://www.bloomberg.com/news/articles/2017-12-11/the-yield...
https://www.nytimes.com/2018/06/25/business/what-is-yield-cu...
The general reason people think rates will go down in the future is if a recession is coming, and the govt will lower them. In this case the rates may high for 2 years, but lower long term. (The 10 year rate is just a weighted average of interim rates)
The Yield Curve™ is the difference between the yields of two treasuries -- in this article it is the 5-year Treasury note minus the 3-year Treasury note. When this difference is negative that means the 5-year note has a lower yield than the 3-year note.
Investors typically want the highest yield possible, so they'll invest in the 3-year note rather than the 5-year note. A negative spread (difference) can indicate that investors are more confident about the short-term than the long-term.
Note there isn't really a single "Yield Curve". You can take the spread between any two terms of a Treasury note -- e.g. the 30-year and 10-year or the 10-year and 2-year notes. The Federal Reserve provides a spread for the 10-year minus 2-year: https://fred.stlouisfed.org/series/T10Y2Y
Although there is enough variety in the details of government bonds that you could argue there is more than one there. The proposition that there is a single yield curve is more obviously true for things like interest rate swaps.
https://en.wikipedia.org/wiki/Yield_curve#Relationship_to_th...
"Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed."