What's going on?

There was much consternation on Tuesday after the US �yield curve� inverted: 3-year US bonds are now paying more than 5-year ones. For some, that�s a signal of an impending (gulp) recession (tweet this)…

What does this mean?

When investors buy a government�s bonds, they�re loaning it money with the expectation that they�ll be repaid. Different bonds have different payback dates, and yields (the returns on offer) are typically higher for longer-term bonds than for shorter-term ones, to compensate for the extra risk involved.


But now US 3-year bonds are paying better than 5-year ones: the curving trend of long-term bonds paying more than short-term ones is inverted. This means that investors think the leader of the free world is less likely to pay back a loan three years from now than it is in five years� time. There are various reasons for this unusual state of affairs: most notably, investors may think that either interest rates or inflation will soon fall. Both of those factors are linked to an economic slowdown � which is why some view the inverted yield curve as a harbinger of recession.

Why should I care?

For markets: More to follow…

Investors don�t really care about this yield curve: they focus on the difference between 2-year and 10-year bond returns. The gap between those two is the smallest it�s been since 2007, but the relationship hasn�t yet inverted. That being said, every past inversion between 3- and 5-year bonds has, without exception, been followed by a 2-10 inversion…

For you personally: Don�t panic!

Some people are now sounding the alarm, pointing to the fact that a 2-10 inversion has preceded every US recession since the 1950s. But there�s no need to panic just yet. There�s historically been a lag time of about two years between a 3-5 inversion and a recession: so if one is coming, there should be plenty of time to get ready.