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When A Yield Curve Inversion Means Recession

Published Sun, 31 Mar 2019 22:26:15 -0400 on Seeking Alpha

Interpreting the Yield Curve
Generally speaking, the yield curve refers to varying yields on U.S. treasury bills, notes and bonds. It can be used in describing other fixed-income securities, but for the purposes of this article, we will focus on treasury securities. Before we get into why the yield curve inverts and what that means, I thought it would be helpful to understand what drives the shape of the yield curve. In one word: risk. But it may not be actual risk as much as perceived risk (or expectations) that determines the shape and steepness of the yield curve.
In a normal environment of expanding economic activity with low-to-moderate inflation and perceived expectations of further growth well into the future, investors will require that the yield increase for each additional period to maturity. Therefore, the “normal” yield curve would slope upward, with short-term yield being less than longer-term yields. In chart form, it would look like this:

(Source: Investopedia)
The reason the perceived risk increases over time and, therefore, the higher yield that is required is that the further we go into the future, the greater the uncertainty. Uncertainty is a form of risk, and investors want to be compensated for assuming that heightened risk.
The opposite is also true, which is why the yield curve sometime inverts. When investors perceive that the economy is more likely to slow down over the short term (1-3 years) the yield curve will invert, with... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
CORNERSTONE TOTAL RETURN FUND 11.05   0.0 0.00 2.48 22.40
VANGUARD EXTENDED DURATION TREASURY ETF 142.38   0.0 0.00 0.00 2.21
SPDR DOW JONES INDUSTRIAL AVERAGE ETF TRUST 262.56   0.0 0.00 5.67 2.18
PROSHARES ULTRAPRO SHORT S&P 500 27.77   0.0 0.00 0.00 2.13
SPDR S&P 500 ETF 292.36   0.0 0.00 5.42 1.87
PROSHARES ULTRASHORT S&P 500 30.82   0.0 0.00 0.00 1.86
POWERSHARES QQQ TRUST SERIES 1 182.07   0.0 0.00 1.49 0.79
SPDR BARCLAYS CAPITAL 1-3 MONTH T-BILL ETF  

CORNERSTONE TOTAL RETURN FUND - CRF
CORNERSTONE TOTAL RETURN FUND - CRF  


Older articles featuring Cornerstone Total Return Fund (CRF):
Pay Attention To The Message The Yield Curve Is Sending
Negative-Yielding Debt: Monetary Contagion Spreads
The Dollar, High-Yield Bond Market And S&P 500 Revenue Growth
Two Yield Spreads Are Better Than One For Business Cycle Analysis
Equity CEFs: Where's The Beef In The Delaware Dividend & Income Fund?
Of Slopes And Flops: The Yield Curve Inversion
Ignore The Yield Curve, They Said...
Is The U.S. Yield Curve Signaling A U.S. Recession?
Short And Sharp: Yield Curve Inversion - A False Positive?
Weekly Edge: Yield Curve Sends Mixed Signals

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