We have been hearing a lot about interest rates and the debt ceiling. It’s all over the news and rightfully so.
A variable that is not typical of interest rates is what is called an “Inverted Yield Curve”. It’s a technical term that basically charts what specific interest rates are over periods of time.
A normal, or typical, curve has short-term interest rates that pay lower than long-term rates.
We all remember just a short time ago that our checking accounts, savings accounts, CDs, and Money Market funds paid next to nothing. Normally you are paid a higher rate of interest for the longer period of time you invested in. Currently, the opposite is true, or inverted.
See the chart below.
Currently, Treasury notes issued by the government pay over 5.2% for a 3-month bill. A one-year is currently 4.8% and a ten-year is 3.5%
As investors we are tempted to just buy the 3-month but this curve tells us that investors anticipate rates to come down. If you have short-term needs, short-term rates are great but as
investors, it may be best to look a little farther out and lock in these rates for a longer period of time. I anticipate that the Federal Reserve will raise interest rates again this month but the end is near and this curve will flatten out and short rates like these likely will not move any higher in the foreseeable future.
Call or email Rich Financial anytime for the current T-Bill, money market funds, and CD rates.
What causes this curve?
The answer is inflation and the Fed’s interest rate policy. The Fed has been raising interest rates to slow down an overheated economy. The Federal Reserve can only control short rates while long rates are controlled by market forces.
Inflation was and is caused by the massive amount of new money injected into the system. Government spending does have consequences.
Unfortunately, with near certainty, an inverted yield curve does signal an upcoming recession. We may be in one already but this does point to an economic slowdown.
This week we are hearing a lot about the debt ceiling. The debt ceiling is the amount of money the government can essentially borrow, this is currently a whopping 31 trillion dollars. The issue is how much this limit will or can be increased and how much spending can be either cut or slowed.
It sounds scary but this issue will be solved, it always has been but it does bring to light the government’s spending problem. One small benefit is that it does bring both sides together to negotiate a new ceiling. Something we need to see more of.