Why? Because we are inverted!
The most famous use of that “inverted” phrase naturally comes from one of our favorite childhood movies, Top Gun. Now, as grown ups who run a mortgage & real estate brokerage and enjoy studying economics, being inverted has an entirely different meaning that generally precedes recessions and times of lower mortgage rates!
Talk To Me, Goose!
First a quick econ lesson…the yield curve is a graphical representation of the interest rates (or yields) on bonds of different maturities. Typically, longer-term bonds have higher yields compared to shorter-term bonds. This upward sloping yield curve illustrated from June 2013 is the normal or positive yield curve, making it look like the front side of a jump ramp.
Great Balls Of Fire!
However, when the yield curve inverts, it suggests that investors have a pessimistic outlook on the future economic conditions. Check out how different today’s yield curve looks, like the backside landing of that same jump ramp!
An inverted yield curve refers to a situation where the yields on shorter-term bonds are actually higher than the yields on longer-term bonds. This phenomenon is considered significant because it has historically been a reliable indicator of an impending economic recession.
What Were You Doing There?
Communicating! An inverted yield curve is a way of our markets sounding the warning bells. Over the last 50 years, every time the yield curve has gone negative (below the 0% flat line), an economic recession has followed (shown by the vertical gray bands). Presently, the yield curve is in deeper negative territory than the previous 3 cycles, and has been flirting with levels not seen in many years. In other words, this inversion is deep, serious, and prolonged. We need to pay attention to it!
I Feel The Need, The Need For…
Lower rates!!! These recessionary periods also tend to lower borrowing costs, especially mortgage rates. In each recession for the last 40 years, we have seen mortgage rates drop during these slower economic times. Could we be heading for a steep decline in mortgage rates???
It’s important to note that while an inverted yield curve has been a reliable indicator in the past, it doesn’t guarantee a recession nor lower mortgage rates will occur. It is merely a signal that suggests increased risks and the need for careful monitoring of economic conditions. Nevertheless, we think this reliable tell-tale sign is clear that lower rates are on their way. Stay tuned for more statistical insight on the state of our market, economy, and interest rates. Thanks as always for reading; you can be our wingman anytime! 😉