2nd Day of school and flat yield curve

Today is my older son’s second day of school, and I am just starting to reap the rewards of the extra time available. Don’t get me wrong, I love hanging out with him and enjoyed our summer immensely, but it is nice to have 6-8 hours to myself again.

I want to comment on the markets today, and more specifically yesterday and the drop we experienced in the equity market as it relates to the “inverted yield curve”. The yield curve is simply a curve showing several yields at various lengths of time for a similar debt instrument. It “normally” looks something like this:

“normal yield curve”

Yesterday, however, the yield on 2 year treasury was higher than the yield on the 30 year. In other words the curve has “inverted”. What this means, generally, is that investors have low growth expectations for the future. The news outlets seem to attribute yesterday’s inversion to the 800 point drop on the Dow, however it is my contention that this was merely semantical as the curve has been “flattish” or nearly inverted for some time now. The Fed plays a huge part in this of course and where we are at now which I will explain in another post.

The point of this post is simply that the “bond market” has been screaming recession for a while now, and the equity market is just slower to react.