Alarms were going off in the stock market today. And what pulled the cord was a slight change in the interest rates of Treasurys.
Early Wednesday morning, the interest rate on a 2-year Treasury was slightly higher than the interest on a 10-year, an event called a yield curve inversion.
By market close, the Dow industrials were off 800 points, or 3.05%. The S&P 500 was down 85.72 points, which is 2.93%. And the Nasdaq lost more than 242 points, or 3.02%.
But understanding why the yield curve has gained such importance—even Donald Trump tweeted about the CRAZY YIELD CURVE today—and whether it’s sending true or false signals at the moment, is a little complicated.
Yield curves are a way of comparing the interest rates of the different maturity-date bonds a country issues—like U.S. Treasurys. In a normal market, interest rates (called yields) for longer-term bonds should be higher than those for shorter-term ones, because investors tie their money up for a longer time and want a greater reward for doing so.
The yield curve is a graph of the interest rates for varying maturities: like 3-months, 6-months, 1-year, 2-years, 5-years, 10-year, 30-year, and so on. A line is drawn through the plotted points to show a curve. Below is an example for the yields on Aug. 13, 2019.
This is not a normal yield curve, even without a brief time where the 10-year yield was a little lower than the 2-year.