Flat Yield Curve
Categories: Bonds, Metrics, Muni Bonds
Happens in blue moons and when the cost of renting money is the same for a short period of time or a long period of time.
A normal yield curve goes... up. That is, the cost of borrowing money in the short term is cheaper than the cost of borrowing money in the long term. It's important to understand with bonds. If you're investing in bonds, a flat yield curve happens when the yield on long-term and short-term bonds is pretty much the same. When that happens, there's no point in investing for the longer term—you're not making any more money. When you see a flat yield curve on investments, it can mean that the economy's headed into a recession.
Time to pay attention and get ready to batten the hatches.
Example
You're looking at U.S. Treasury bonds and you're wondering whether to invest long-term or short-term. The three-year bond has a yield of 6%. You look at the 20-year bond. The yield is 6.2%. Uh-oh. That's a flat yield curve. Time to make sure your investments would do okay in a recession.