An inverted yield curve has always signaled a recession. But what happens when the inverted yield curve decides to disappear?
Today, we’re going to find out what happens to our economy—whether a recession is on the horizon or not.
We all know the Federal Reserve is extremely responsible for how the economy reacts. But how exactly are the Federal Reserve’s actions influencing the market?
Well, when the Fed cuts rates, borrowing becomes extremely cheap. That means banks can lend more money, which increases the money supply in the economy. And to make it as simple as possible—if you just look at this chart, it’s color-coded with easy graphics for anyone to understand—the Fed cuts rates, borrowing costs go down, and then buyers jump in.
And what happens when buyers jump in? Demand goes up. And then prices go up.
Rates are always fluctuating. And of course, it’s the complete opposite when rates are rising rather than being cut.
More money in circulation typically means more inflation, because there’s more demand chasing the same goods—which, of course, we all know drives up prices.
Now, when inflation rises too fast, investors demand high long-term interest rates to compensate for the amount of risk.
So what happens when there’s a reversal in the yield curve? And what does this mean for you and your portfolio?
If you don’t know what the inverted yield curve is—it’s basically when short-term interest rates are higher than long-term rates.
To put that into perspective, let’s say there’s a bank that wants to lend money out to a person. This person wants to take a short-term interest rate. Now, the bank is giving you secondhand interest rates, because the interest rate they got from the Federal Reserve is vastly different from the one you’re going to get.
And if you pay attention to what they’re lending, you can see where their trust is. For instance, if they’re raising their short-term interest rates, they think there’s probably a higher chance you’re going to default. So they’re going to try and take as much money as they possibly can—upfront and sooner.
Now, with long-term rates, of course, they have a much longer time horizon. So they’re able to charge a little bit more because it’s extended for a longer period of time. This inevitably allows them to get the amount of profit they’re looking for on the money they’re loaning.
Studying these two different things—and when they’re flip-flopping—has indicated recessions in the past.
When everyone was talking about the inverted yield curve, they were saying short-term rates were higher than long-term rates. But how has that always predated a recession?
Well, that inversion everyone was talking about has actually disappeared. And here’s the weird part—it disappeared while the Fed was cutting rates.
Now let’s break down why this is happening, and how it could directly impact the landscape of how you invest moving forward.
Like I said, historically, the inverted yield curve has always meant trouble. In fact, it’s actually predated every single recession in the U.S. since 1955.
But since September 2024, long-term interest rates have been rising—even as the Federal Reserve started cutting short-term rates.
That seems counterintuitive, right? The Fed is lowering rates, while long-term rates are going up.
Here’s the thing: the Fed controls short-term rates. But long-term rates are largely influenced by inflation expectations and overall money supply.
Since September 2024, long-term rates have been climbing, even as the Fed was cutting short-term rates. Why? Because inflation fears are growing, and investors are demanding higher returns for locking in their money over a long period of time.
As I stated earlier, let’s look at the money supply data. Note its massive uptick in 2020. And now look at the money supply data from the last year—it’s been increasing, and not insignificantly. This means more dollars are chasing the same goods, driving prices up.
That is why long-term rates—like the 10-year and the 30-year Treasury yields—have surged from under 2% to around 5%.
The result? The yield curve has uninverted through what’s called a bear steepener. Short-term rates dropped slightly, but long-term rates shot up.
This has a massive impact on investments and borrowing costs.
So when long-term rates shoot up, what does this mean for your investments?
For starters, long-term bond prices have taken a massive hit. Bond prices and yields move in opposite directions. So as long-term yields rise, bond prices fall. If you’ve been holding long-term Treasuries, you’ve probably noticed some losses.
Second, borrowing costs—like mortgage rates—have climbed, making real estate and other debt-dependent assets less and less attractive.
For instance, if you’re in the car market (which I’m a big enthusiast of), all of these cars are depreciating extremely fast—even the collector ones. There’s no longer any long-term benefit in even the car market right now.
But it’s not all bad news. Short-term Treasuries and high-yield savings accounts are offering safer, higher returns than before.
So how do we position for what’s next?
Well, the bottom line: if rates keep rising, long-term Treasuries remain risky. So what should you do?
Focus on shorter-term duration investments, or assets that benefit from inflation. And keep in mind the key phrase here—benefit from inflation.
For instance, if you look at gold—gold has been breaking new all-time highs. In fact, it just broke a new all-time high once again, passing over the $2,800 mark.
So what does all this mean in the market?
If you’ve been watching this channel, you know I’ve been leveraging software to help my portfolio be active in bullish or bearish scenarios. It’s the most market-neutral strategy that I’ve implemented into my investing.
And if you haven’t seen any of the videos of how it’s been performing, just click some of these videos here. You can actually track the entire thing with me and see how well it’s done during all of this time.
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And like always, my friends—peace.
