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Yield Curve Craziness: All You Need to Know to Keep Making Money

By Matt McCallMar 26, 2019


Head for the hills!

Go to cash!

A recession is coming!

That’s been the cry in the financial media the last few days as we faced the dreaded inverted yield curve.

Should you be scared? Should you change your investing strategy?

No and no.

The yield curve – especially an inverted yield curve – is a legitimate economic indicator. We shouldn’t dismiss it.

At the same time, it’s not as simple as the headlines make it out to be. Nothing ever is.

It’s critical that you know the proper context.

That’s what I want to help you with today, so you understand the scary headlines and can take full advantage of the opportunities created by those who don’t.

What the Heck is an Inverted Yield Curve?

In case you’ve forgotten what you learned in your economics 101 class, let’s start with a refresher on what the yield curve is.

Basically, the yield curve is the measure of interest rates (or yields) from short term to long term. As a rule, short-term yields should be lower than long-term yields. This is a normal yield curve.

It makes sense. If you’re going to park your money in a long-term bond, you want a higher yield to make it worth your while and help offset any risks that may develop while your money is in that bond.

The yield curve “inverts” when short-term rates become higher than long-term rates.

This is what just happened by one measure. The yield on three-month U.S. Treasury bonds ticked higher than the yield on 10-year U.S. Treasury bonds,

In simple terms, the U.S. government is paying you more for lending them money for three months than if you decided to loan them money for 10 years.

This created short-term turbulence because an inverted yield curve is often associated with a looming recession.

Before we go any further, let me make two critical points: First, a recession is not a given. And second, even if one is coming, all indications are that it’s still a ways off… meaning stocks remain your best bet for building wealth.

Critical Context

Information without context is almost as bad as no information at all.

Without the proper context, you are more susceptible to bad decisions that can cost you money from bad investments, missed opportunities, or both.

Here are two critical points of context to keep in mind:

Critical Context Point 1: There are a ton of short- and long-term interest rates out there. That means there are also a ton of different rates you can look at in search of an inversion.

All of the recent headline noise came from the 10-year yield dipping below the three-month yield.

To me, the relationship between the 10-year and 30-year yields is more important. That curve has not inverted. In fact, just the opposite. The spread between the two has increased, which is very healthy.

I also watch the two-year and 10-year yield curve, and this has not inverted either. Interestingly enough, the last five times it has inverted, the S&P 500 continued higher and peaked 19 months later. If that scenario happened today, we’d be looking for a peak in October 2020.

There’s a lot of money to be made in that time. The mean return from when the two-year/10-year relationship inverted to the market peak is 22.3%.

Now is not the time to get all defensive.

Critical Context Point 2: You have to look at which end of the yield curve is moving.

In this particular case, the yield on three-month Treasuries is moving higher more than the 10-year yield is falling.

There’s a very simple explanation for that: The Federal Reserve has raised interest rates nine times in a little over three years.

The Fed has much more control over short-term rates. Long-dated yields are more market driven.

You need to watch both ends. The Fed last pressured short-dated bond yields in the 1990s, according to LPL. The short end of the yield curve inverted twice in that decade but the 10-year/30-year never did.

How to Make Big Money Now

Don’t let the kneejerk selling, scary headlines, or talk of a recession shake you out of the market.

More important measures like the 10-year/30-year have not inverted. Interest rates remain historically low, which is undeniably good for stocks. And even if the yield curve does invert, history tells us there are still more big gains ahead.

Stocks remain the greatest wealth-building tool available to us. That has not changed.

In fact, when everyone else sells over yield curve headlines, smart investors know exactly what to buy.

The key to building great wealth is investing early in massive themes and holding for the long term to make outsized returns.

I’m talking about technological innovations like the coming battery breakthrough, or the next-generation of wireless networks that will underpin the Internet of Things (IoT) and most future innovations.

I’m talking about the dramatic shift to Transportation 2.0 with electric cars that drive themselves.

Healthcare breakthroughs like gene therapy.

And demographic tidal waves like the explosion of medical and recreational marijuana use brought about by sweeping legalization across the globe.

This is how to earn life-changing profits over time, regardless of the yield curve.

P.S. The legalization of marijuana is clearly the big trend right now, and we’ve more than doubled our money in three cannabis stocks in less than eight months.

Two of those three stocks just went public last year and were identified through my Cannabis Cash Calendar system.

My next Cannabis Cash Calendar recommendation is just a few days away.

You can get exclusive access to it as soon as it’s released to my Investment Opportunities readers. Click here to learn how to get on the list to be notified.

Regular MoneyWire readers know that I believe the legalization of marijuana is one of the great investing opportunities of the next decade.

Even if you don’t know a thing about the marijuana markets… even if you’ve never bought a stock before. If you have just a small stake, you could make a lot of money over the next 12 months. Click here to learn more about this incredible story.

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