Visualizing (and Understanding) an Inverted Yield Curve
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Visualizing (and Understanding) an Inverted Yield Curve

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Visualizing (and Understanding) an Inverted Yield Curve

For a few months in 2019, the yield curve inverted and warned of a potential recession.

Towards the end of 2021, it happened again. And throughout 2022, the inverted yield curve has looked more and more extreme. So what does an inverted yield curve look like, and what does it signal about an economy?

The above visualization from James Eagle shows the yield curve from November 2021-2022 using eurodollar futures yields—which serve as an indicator for the direction of the yield curve.

What Denotes an Inverted Yield Curve?

Generally speaking, the yield curve is a line chart that plots interest rates for bonds that have equal credit quality, but different maturity dates.

In normal economic conditions, investors are rewarded with higher interest rates for holding bonds over longer time periods, resulting in an upward sloping yield curve. This is because these longer returns factor in the risk of inflation or default over time.

So when interest rates on long-term bonds fall lower than those of short-term bonds, it results in an inverted yield curve.

The worrying trend is that an inverted yield curve in key government securities such as U.S. Treasuries can often foreshadow a recession. For every recession since 1960, an inverted yield curve took place roughly a year before, with just one exception in the mid-1960s.

This is because the yield curve has steep implications for financial markets. If the market predicts economic turbulence, and that interest rates will fall in the long term, investors flock to buy longer-dated bonds.

Eurodollars: A Hedging Tool

Let’s now look at eurodollar futures, as seen in the above visual.

Eurodollars are not to be confused with euros, the currency in the European Union. Instead, they are U.S. dollars held in term deposits outside of the United States. Originally it applied to accounts specifically in Europe, hence the “euro” prefix.

The video above charts eurodollar futures, which allow banks and companies to secure interest rates today for USD funds they plan to lend or borrow at a future date. In short, the yields on these futures can tell us how banks and companies around the world feel about interest rates—and economic strength.

How The Yield Curve’s Inversion Has Gotten More Extreme

The animation above clearly shows how the yield curve hasn’t just inverted, it has become more severe:

DateYield CurveExample Eurodollar Futures Yield
Jan-Feb 2022Upward SlopingMar 2023: 1.3%
Mar 2024: 2.0%
Mar-Aug 2022FlatMar 2023: 2.5%
Mar 2024: 2.5%
Sep-Nov 2022Downward SlopingMar 2023: 5.0%
Mar 2024: 4.0%

As the above examples show, yields on March 2023 eurodollar futures contracts have continued to rise over the course of the year—from 1.3% to 5.0% by November.

Meanwhile, March 2024 eurodollar futures yields over the same time period began higher than their 2023 counterparts but eventually became eclipsed.

And more immediately, December 2022 eurodollar futures yields in November were much higher than 2024 yields. Not only does this indicate investor pessimism, it suggests that the market expects interest rates to fall by 2024 and for inflation to decline.

The Flip Side

On the other hand, market expectations of looser monetary policy in the future could miss the mark.

“I suspect the market is getting a little ahead of itself in terms of pricing in cuts… Central banks have still been talking about holding rates at higher levels for longer.”

– Andrew Ticehurst, rates strategist for Nomura Inc.

As 2023 unfolds, investors will be watching closely to see if the inverted yield curve indeed serves as a recession harbinger, and the wider consequences of this potential outcome.

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This article was published as a part of Visual Capitalist's Creator Program, which features data-driven visuals from some of our favorite Creators around the world.

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Markets

Ranked: Top Countries by Stock Market Ownership

Where will people feel the most effects of financial markets turmoil? We rank countries by their stock market ownership rate.

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This cropped graphic tracks the stock market ownership rate for 33 select countries, as well as the number of shareholders in each country.

Ranked: Top Countries by Stock Market Ownership

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.

Key Takeaways

  • 55% of the American population is invested in the financial markets.
  • They are the top country by stock market ownership, followed by Canada (49%).

The rise of no-fee investment platforms have pushed people into the stock market, particularly those under the age of 35.

But some countries have a mature investment landscape, with a higher share of the population already holding invested assets.

We rank the stock ownership rate for 32 countries using data from HelloSafe, a financial services comparison website. They used the latest available figures available at the World Bank from 2023–2024.

This data includes direct shareholding as well as exposure via life insurance and pension funds.

Which Countries Are Most Invested in the Stock Market?

More than half of the American population (55%) is invested in the stock market, the highest for any country in this dataset.

RankCountryRegion% of shareholding
population
# of shareholders
1🇺🇸 U.S.Americas55%185.4M
2🇨🇦 CanadaAmericas49%19.1M
3🇦🇺 AustraliaOceania37%9.6M
4🇬🇧 UKEurope33%22.1M
5🇳🇿 New ZealandOceania31%1.6M
6🇸🇪 SwedenEurope22%2.3M
7🇷🇺 RussiaEurope21%30.5M
8🇫🇮 FinlandEurope19%1.0M
9🇨🇭 SwitzerlandEurope18%1.5M
10🇮🇪 IrelandEurope17%901K
11🇻🇳 VietnamAsia16%16.2M
12🇯🇵 JapanAsia15%18.7M
13🇫🇷 FranceEurope15%10.3M
14🇵🇹 PortugalEurope15%1.5M
15🇩🇪 GermanyEurope14%11.8M
16🇳🇱 NetherlandsEurope14%2.5M
17🇿🇦 South AfricaAfrica14%8.5M
18🇭🇰 Hong KongAsia14%1.0M
19🇹🇼 TaiwanAsia13%2.9M
20🇪🇸 SpainEurope13%5.9M
21🇸🇬 SingaporeAsia8%473K
22🇧🇷 BrazilAmericas8%17.1M
23🇮🇹 ItalyEurope7%4.1M
24🇨🇳 ChinaAsia7%98.7M
25🇮🇳 IndiaAsia6%85.8M
26🇦🇹 AustriaEurope6%510K
27🇧🇪 BelgiumEurope5%590K
28🇵🇱 PolandEurope5%1.8M
29🇦🇷 ArgentinaAmericas5%2.3M
30🇵🇭 PhilippinesAsia2%1.8M
31🇲🇽 MexicoAmericas1%1.5M
32🇲🇦 MoroccoAfrica1%190K

Ranked second, 49% of all Canadians are invested, and the two North American countries are far ahead of the rest of the world.

Many of the top 10 countries have public pension funds linked to markets, which may help increase their ownership rates.

Interestingly, the two most populous countries in the world, India and China both have single-digit stock market ownership rates at 6% and 7% respectively.

However even these small shares are large shareholding communities, numbering nearly 100 million each.

Ticket to Turbulence

The first four months of the new Trump presidency has been the single-worst start to a term for financial markets.

Before the newest pause on tariffs, the S&P 500 had lost 15% of its value since January, the most for a new term since the index started in 1957.

However, as the White House reinstated yet another pause on its earlier announced tariffs, markets regained some of its lost ground. (It’s still down 7% YTD as of writing this post).

With more than half of the American population invested, this turbulent ride is being widely felt.

Learn More on the Voronoi App

The S&P 500 has outperformed every other stock exchange in the world since 2015. Check out: Top Countries by Stock Market Returns Since 2015 to see where other top exchanges like the DAX and FTSE rank.

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