The yield curve is inverted and has been since July of last year. What’s a yield curve, and why are we talking about interest rates again?

The yield curve is a graph that shows the relationship between interest rates and the time to maturity of bonds. Bonds and specifically treasuries are typically sold in maturities ranging between 1 month and 30 years. The curve is an important concept because it can provide insights into the economy and potential directions of the economy. While not a science, some prior recessions have occurred around 18 to 24 months after an inversion.

Keep in mind that forward-looking markets are different than the economy. The first quarter of 2023 has seen markets trending upward. So why have stock markets been going up even though this curvy indicator may be signaling economic decline? The markets are always anticipating the next move, whether it’s an end to rising interest rates, or even a shift to lower rates.

Market uncertainty is high, especially in the short term. Some things were watching: the Fed is expected to announce an interest rate hike of 0.25% next week, inflation has been decreasing in terms of rate of change, and the jobs market shows signs of softening. Zooming into the short end of the yield curve, the debt ceiling discussion in Congress may be related to the unusually large difference between 1 and 3-month treasury rates.

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