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What Is the Yield Curve and How to Understand It

Something you are seeing a lot about on TV lately and online is the yield curve. What the heck is the yield curve? The yield curve has to do with short-term and long-term interest rates. Specifically, when talking about government treasuries and securities.

Basically, short-term interest rates are higher paying right now than long-term interest rates and that’s not suppose to happen. It is also a recession indicator. There are a lot of recession indicators out there right now. I think it’s good for us as middle Americans to just watch out for these indicators. They’ re good signs. CNN Money and all kinds of websites out there are putting out these signs for us to read and be aware of what’s going on with rates.

Naturally, the longer you invest the more interest you should get on your money–the more return you should get. But short-term rates are higher paying than long-term rates. That’s not a good thing. That means the yield curve has inverted. It’s going down and every single time that this has happened dating back to 1956 I believe, a recession has followed six months to 18 months after.

Now, who knows if that is going to happen or not? Again, it’s just a sign. It’s an indicator. We need to pay attention to it because this effects our saving rates in the banks, it effects rates at insurance companies, it effects mortgage rates and it’s going to put a lot of pressure on the stock market as well because you’re basically going to go to cash or go to the stock market.

I think the point there is, why take a full risk when you’re in this phase in life? Especially, when the writing is on the wall. Again, it may be okay. It may not pan out that way, but why take the risk? Why have to worry when you’re on your cruise or taking a vacation that something could go wrong with your retirement plan?

So let’s pay attention to these indicators and warning signs as we’re planning for retirement.