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Why Markets are Worried About the Yield Curve

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Why Markets are Worried About the Yield Curve

Explainer: Why Markets are Worried About the Yield Curve

If you pay any attention to financial media, chances are that you’ve heard increased chatter about the flattening “yield curve” in the past few weeks.

For professional investors, talking about the yield curve is close to second nature – but to most regular folks, the words probably sound very abstract or esoteric.

What’s a Yield Curve?

The yield curve is a curve showing several yields or interest rates across different bond contract lengths.

In a normal credit environment, the premise is that yields are higher for longer maturity bonds.

Normal Yield Curve

In a way, this is similar to what you’d expect if you went to the bank and put your money into a time deposit. For example, if you put your money in for five years, you’d expect a higher return per year than if you put your money in for six months.

Why? You’re taking on more risk, and therefore deserve a higher rate of compensation.

Out of Whack

Sometimes the market gets out of whack, and yield curves do some interesting things.

Yield Curve Inversion

As you can see above, sometimes long-term interest rates can be equal to those of short-term rates. This is called a “flat” yield curve.

Or, when long-term rates fall below short-term rates, that is an “inverted” yield curve. As you’ll see shortly, this can be a signal of trouble in credit markets and the greater economy as a whole.

The Curve Everyone is Talking about

While a yield curve can be shown for any bond, there is one particular yield curve that you’ll often see referenced by financial journalists and analysts.

That would be the yield curve for U.S. Treasuries, the bonds issued by the U.S. federal government to fund its activities. More specifically, the difference between 10-year and 2-year bonds has been a historical indicator of the health of the economy and markets.

And despite this curve looking pretty normal since the financial crisis, it has been flattening over time:

2-yr3-yr5-yr7-yr10-yrDifference (10yr - 2yr)
20140.54%1.02%1.72%2.16%2.48%1.94%
20150.74%1.05%1.53%1.92%2.20%1.46%
20160.74%0.86%1.12%1.39%1.54%0.80%
20171.27%1.38%1.63%1.88%2.05%0.78%
20182.64%2.71%2.76%2.83%2.88%0.24%

Source: U.S. Treasury Dept (Each year’s data corresponds to this day in September)

In 2014, the difference for 10-year and 2-year bonds was 1.94%. Today, the difference is just 0.24%!

Why It Matters

There are various interpretations out there of what an inverted yield curve could mean for markets.

There are also pundits out there who say things are different this time around. There is some validity to this, as things are never cut and dry in economics. Besides, this wouldn’t be the first time that global credit markets have acted in strange ways since the crisis.

That all said, the reason the inverted yield curve is a topic of conversation is simple: inverted yield curves have preceded every post-war U.S. recession.

So now you know what the fuss is about – and maybe, just maybe, you’re more inclined to dive deeper into the exciting world of yield curves.

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Markets

Will Tesla Lose Its Spot in the Magnificent Seven?

We visualize the recent performance of the Magnificent Seven stocks, uncovering a clear divergence between the group’s top and bottom names.

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Will Tesla Lose Its Spot in the Magnificent Seven?

This was originally posted on our Voronoi app. Download the app for free on iOS or Android and discover incredible data-driven charts from a variety of trusted sources.

In this graphic, we visualize the year-to-date (YTD) performance of the “Magnificent Seven”, a leading group of U.S. tech stocks that gained prominence in 2023 as the replacement of FAANG stocks.

All figures are as of March 12, 2024, and are listed in the table below.

RankCompanyYTD Change (%)
1Nvidia90.8
2Meta44.3
3Amazon16.9
4Microsoft12
5Google0.2
6Apple-6.7
7Tesla-28.5

From these numbers, we can see a clear divergence in performance across the group.

Nvidia and Meta Lead

Nvidia is the main hero of this show, setting new all-time highs seemingly every week. The chipmaker is currently the world’s third most valuable company, with a valuation of around $2.2 trillion. This puts it very close to Apple, which is currently valued at $2.7 trillion.

The second best performer of the Magnificent Seven has been Meta, which recently re-entered the trillion dollar club after falling out of favor in 2022. The company saw a massive one-day gain of $197 billion on Feb 2, 2024.

Apple and Tesla in the Red

Tesla has lost over a quarter of its value YTD as EV hype continues to fizzle out. Other pure play EV stocks like Rivian and Lucid are also down significantly in 2024.

Meanwhile, Apple shares have struggled due to weakening demand for its products in China, as well as the company’s lack of progress in the artificial intelligence (AI) space.

Investors may have also been disappointed to hear that Apple’s electric car project, which started a decade ago, has been scrapped.

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