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The Yield Curve Inversion Spooks The Financial Markets

The 10-year Treasury yield has fallen below the 3-month Treasury yield after many years. This has occurred last in 2006. Generally, this inversion is a sign of a recession to occur soon.

The markets sold off on Friday after the inversion on the yield curve was sighted. However, there was a slow recovery on Monday. But on Wednesday, the inversion was deeper on the yield curve. The 10-year yield has fallen 3.4 basis points and was at 2.377 percent. The 3-month bill was at 2.443 percent yield.

Analysts have come with various opinions on the inversion and Wall Street investors are on edge over the situation. CIO Krishna Memani from OppenheimerFunds says that this inversion curve is an important phenomenon that should not be ignored. However, he says that the level of rates is more important than the shape of the curve.

The interest rates by the Fed were hiked 4 times in 2018. But in 2019, the Fed had said that it would be patient with the rate hike and there has been no hike till now in 2019.

In addition, Janet Yellen, the former Fed Chair has said that the inversion curve is an indication of a cut in interest rates and not an indication of a recession.

For some, the particular segment at which the yield curve should be taken varies. Analysts from Goldman Sachs claim that investors should look at the 2-year and 10-year differential instead of the 3-month and 10-year yield.

However, Tony Dwyer, the chief market strategist at Canaccord Genuity says that the inversion does not spell doom immediately for the equity markets. It rather indicates a buy signal for the short term than to go on the defensive.

Marko Kolanovic, a global head from J.P. Morgan says that historically, after the inversion curve, the market is at its strongest for 30 months, after which the return drops below average.

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