Interest Rates & the Economy
Do you know which factors influence bond yields and why the gap between short- and long-term yields is often viewed as an economic indicator?
This Week, Craig Siminski of CMS Retirement Income Planning, shares an article that sheds light on this often difficult-to-understand subject:
The yield curve is a graph with the rates of U.S. Treasury bonds plotted by maturity. The slope of the curve is the difference between short-dated bonds and long-dated bonds.
Normally, it curves upward as investors demand higher yields to compensate for the risk of lending money over a longer period. The curve flattens, however, when the rates converge.
Investors pay attention to the yield curve to identify buying opportunities in the bond market and because it has a history of forecasting economic growth. A flat yield curve suggests that inflation and interest rates are expected to stay low for an extended period of time, signaling economic weakness. A steep curve indicates stronger growth ahead.
In the first week of December 2018, the difference between 10-year and two-year Treasury yields — an indicator that tends to be closely watched by investors — was the narrowest since 2007, though still positive.
The flattening yield curve was partly to blame for a year-end spike in stock market volatility, because some economists and investors took it as a warning that…
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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 21 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.
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