Thread by @FinPlanKaluAja1

Global markets are falling because the US Yield Curve turned negative.

What the heck is a yield curve?

The yield curve is a line plotting out yields across maturities. It is a graph where yields for fixed income assets are plotted. It usually slopes upward.

Why?

As an investor, if you lend for 3 years you usually demand more returns than if lend for 3 months

The theory is because there are more unseen risks and unpredictable volatility in the future, you demand more for longer term investments.

So normal Yield Curve slopes upward

However with a yield inversion, the lenders/Investors prefer yield today 3 months than in 3 years....

why?

The invertors may be signaling a coming recession, which means future long term rates will fall...thus yield for short term instrumnents goes up, thus inversion.

So does an inverted yield mean a recession?

Well not automatically

Last 7 recessions have been preceded by a yield curve inversion; but remember Correlation is NOT Causation. There is no model that can predict the future.....None
.

What does an investor exposed to the US markets do?

1. Hedge: Protect your portfolio. buy "insurance" eg bonds

2. Do not panic & sell. Selling actualized a loss position. If you bought on fundamemtals, stick to it

3. Look for opportunities, be greedy when others are fearful