By Stephen McBride via Iris.xyz
A reader asked me last week if it’s time to head for the exits.
There’s a lot of fear in the markets right now. Folks are nervous. Maybe you’re nervous.
The past two weeks have been rough for the stock market. The S&P 500 recently suffered its worst day of the year. And stocks have now dipped 4% since hitting record highs in late July.
If you watch any financial TV, you’ve surely heard this blamed on a troubling economic signal triggered last week called the “inverted yield curve.”
I’ll tell you in a moment why it’s actually a good sign for stocks. But before that, let’s clarify what the inverted yield curve is… and why it matters to you.
What the Heck Is an Inverted Yield Curve?
If you’ve applied for a mortgage, you know the two most popular options are a 15-year mortgage or a 30-year mortgage.
The interest rate you’ll pay on a 15-year mortgage is lower than what you’d pay on a 30-year one.
Which makes sense, right?
With the 30-year mortgage, you’re borrowing the bank’s money for twice as long. So you must pay a higher rate.
It’s the same with the interest rates that the US government pays on its bonds.
99.9% of the time, the longer out a bond goes, the higher rate it pays. A 10-year bond almost always pays higher interest than a two-year bond.
But on August 14, the interest rate on the 10-year US bond sunk below the interest rate on a two-year bond.
This “upside-down” situation is what investors call an inverted yield curve.
Read the full article at Iris.xyz.