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The Inverted Yield Curve and Recessions

So far, there are no indications we may see the often discussed year-end Santa Claus rally, with the market taking on a Grinch-like posture. There is more than one narrative around what is driving the latest market downturn. In reality, it appears confusing because more than one major factor is in play. Let’s break down the major issues.

First, there is much talk about the “inverted yield curve” and a subsequent, pending recession. Unless you are interested in finance, economics or, like me, a nerd, you probably do not know what an inverted yield curve is.1 To understand that, we first need to understand how bonds work.

Bonds are simply loans. There are two main factors that impact bond returns: credit risk and duration. If you loan money to McDonald’s, you expect to be paid back. It has very strong credit, has been aro