Question

The global stock markets had a sell-off yesterday. Last week, the Fed decided to cut the overnight interest rates by 25 basis points; the US Yield Curve shifted. Please discuss the current US yield curve. What are the implications? Illustrate.

Answer 1

Currently, the United States yield curve is inverted. The yield curve is a curve that depicts interest rates on the bonds that have different maturity times. Currently, the United States yield curve is inverted. The implication of the inversion of the U.S. yield curve is that a period of economic weakness actually is approaching. Looking at the 10-year Treasury bond, it is clear that it has been falling sharply in the recent past below the 3-month government debt. Note that if a yield curve inverts it signifies that a recession is about to begin if the government fails to put up measures that can make the economy to avoid it.

The shape of the yield curve assists investors to comprehend how the interest rates will change in future times. Besides, the yield curve shape depicts likely economic fluctuations. The inverted yield curve indicates that the short-term yields will become higher as compared to the long-term yields. Normally, when the United States economy changes from the healthy growth to contraction, the yield curve will first flatten, after which it will get inverted. Therefore, the current inversion of the U.S. yield curve implies that the economy will contract and enter into a recession in the future.