Recession Signs: Yield Inversion

While there are many indicators that point to a strong economy, there is another signal that may be indicating otherwise.

The term yield inversion has been in finance news recently, but what does it mean? Let’s take a look at the yield inversion curve and how it can affect you.

What is Yield Inversion?

A yield curve is a line plotting the different interest rates of bonds that mature at different dates. In a healthy economy, long-term bonds pay more interest (or have a higher yield) than the short term. Buying a 10-year bond should have a higher yield than a 2-year bond because you are locking the money up for a much longer time.

A yield inversion happens when long-term yields fall below short-term yields.

This signals uncertainty and fear in the markets and has been a historical indicator of a looming recession.

How Accurate Are We Talking?

As far as financial indicators go, the yield inversion curve has proven to be a strong indicator of a looming recession. It has predicted the last 7 recessions going back 50 years.

How Soon Could it Happen?

The 2-year and 10-year bonds have recently experienced a yield inversion, signaling a possible recession. But that doesn’t leave you without time to prepare.

In the past, it has taken between 12-24 months from the time of the yield inversion until the recession hit. That leaves a moderate amount of time to get your finances in order before you will feel the impacts of the recession, should there be one.

What Steps Should You Take?

While it’s hard to predict the financial impact a recession will have on your individual finances, it is almost certain there will be some effects.

During a recession, unemployment goes up and many people find themselves out of work through no fault of their own. Jobs that have been secure for years are suddenly in jeopardy. Prices go up and the opportunities to earn money dwindle by the day.

There is no way to know if any or all of these things may happen to any particular person, as each individual’s situation is vastly different. But if a recession does hit and you find yourself facing one of these scenarios, it will be much more difficult financially if you are already deep in debt.

Why Can’t I Live On Credit?

During times of financial downturn, it is common for people to rely on credit to pay for too many things. Just because people run out of money doesn’t mean they run out of needs.

But if you have ever faced down piles of credit debt, you already know this is a terrible idea. As interest rates on credit cards lurch higher and higher, the cost of borrowing goes up and up until it is unsustainable. And once you find yourself picking and choosing which bills to pay, the battle has already turned against you.

At CreditGUARD we hope the indicator proves inaccurate and that the economy continues to improve, as that would be best for everyone. But we also understand that having a plan in place for difficult times is essential to economic survival.

If you’re living with a debt situation that is causing you to fall behind, give us a call today and see how our certified credit counselors can help you prepare by getting your debt under control with our debt management plan and creating a budgeting plan that works for you.