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.
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.
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-yr||3-yr||5-yr||7-yr||10-yr||Difference (10yr - 2yr)|
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.
The Silver Series: The Start of A New Gold-Silver Cycle (Part 1 of 3)
As the decade-long bull run shows signs of slowing, is it time for precious metals to shine? Here’s why it could be the start of a new gold-silver cycle.
The world has experienced a decade of growth fueled by record-low interest rates, a burgeoning money supply, and historic debt levels – but the good times only last so long.
As the global economy slows and eventually begins to retract, can precious metals offer a useful store of value to investors?
Part 1: The Start of a New Cycle
Today’s infographic comes to us from Endeavour Silver, and it outlines some key indicators that precede a coming gold-silver cycle in which exposure to hard assets may help to protect wealth.
Bankers Blowing Bubbles
Since 2008, central bankers around the world launched a historic market intervention by printing money and bailing out major banks. With cheap and abundant money, this strategy worked so well that it created a bull market in every sector — except for precious metals.
Stock markets, consumer lending, and property values surged. Meanwhile, the U.S. Federal Reserve’s assets ballooned, and so did corporate, government, and household debt. By 2018, total debt reached almost $250 trillion worldwide.
Currency vs. Precious Metals
The world awash in unprecedented amounts of currency, and these dollars chase a limited supply of goods. Historically speaking, it’s only a matter of time before the price of goods increases or inflates – eroding the purchasing power of every dollar.
Gold and silver are some of the only assets unaffected by inflation, retaining their value.
Gold and silver are money… everything else is credit.
– J.P. Morgan
The Perfect Story for a Gold-Silver Cycle?
Investors can use several indicators to gauge the beginning of the gold-silver cycle:
- Gold/Silver Futures
Most traders do not trade physical gold and silver, but paper contracts with the promise to buy at a future price. Every week, U.S. commodity exchanges publish the Commitment of Traders “COT” report. This report summarizes the positions (long/short) of traders for a particular commodity.
Typically, speculators are long and commercial traders are short the price of gold and silver. However, when speculators and commercial traders positions reach near zero, there is usually a big upswing in the price of silver.
- Gold-to-Silver Ratio Compression
As the difference between gold and silver prices decreases (i.e. the compression of the ratio), history suggests silver prices can make big moves upwards in price. The gold-to-silver ratio compression is now at high levels and may eventually revert to its long-term average, which implies a strong movement in prices is imminent for silver.
- Scarcity: Declining Silver Production
Silver production has been declining despite its growing importance as a safe haven hedge, as well as its use in industrial applications and renewable technologies.
- The Silver Exception
Silver is not just for coins, bars, jewelry and the family silverware. It stands out from gold with its practical industrial uses which account for 56.1% of its annual consumption. Silver will continue to be a critical material in solar technology. While photovoltaics currently account for 8% of annual silver consumption, this is set to change with the dramatic increase in the use of solar technologies.
The Price of Gold and Silver
Forecasting the exact price of gold and silver is not a science, but there are clear signs that point to the direction their prices will head. The prices of gold and silver do not accurately reflect a world awash with cheap and easy money, but now may be their time to shine.
Don’t miss another part of the Silver Series by connecting with Visual Capitalist.
Decentralized Finance: An Emerging Alternative to the Global Financial System
What is decentralized finance? Learn how technology is changing the rules of the game, creating the potential for a new financial system to emerge.
Decentralized Finance: An Emerging Alternative
The global financial system has created massive wealth, but its centralized nature means the spoils have gone to the people who are best connected to the financial centers of the world.
As global inequality continues to rise, how can wealth building tools become more accessible to the rest of the global population?
Luckily, technological developments and their rapid adoption make this the right time for a new decentralized financial system to emerge:
- The Internet: 3.9 billion users by the end of 2018
- The proliferation of smartphones: Two-thirds of the unbanked have mobile phones
- Digital banking: over 2 billion users by end of 2018
- Bitcoin and Blockchain: the emergence of new public blockchains
Today’s infographic comes to us from investment app Abra, and it highlights how public blockchains could help to enable a decentralized finance system.
What is Decentralized Finance?
Decentralized finance describes a new decentralized financial system that is built on public blockchains like Bitcoin and Ethereum. After all, Bitcoin and Ethereum aren’t just digital currencies — they’re foundational open source networks that could be used to change how the global economy works.
There are six primary features that differentiate public blockchains from the private networks used by governments and traditional financial institutions:
- Permissionless: Anyone in the world can connect to the network
- Decentralized: Records are kept simultaneously across thousands of computers
- Trustless: A central party isn’t required to ensure transactions are valid
- Transparent: All transactions are publicly auditable
- Censorship Resistant: A central party cannot invalidate user transactions
- Programmable: Developers can program business logic into low-cost financial services
In such a financial system, users will have access to apps that use public blockchains to participate in new open global markets – but how would this shape the global financial system for the better?
The Potential Impact of Decentralized Finance
Here are five ways that decentralized finance will have an impact on the world:
1. Wider Global Access to Financial Services
With decentralized finance, anyone with an internet connection and a smartphone could access financial services. There are a variety of barriers that prevent access in the current system:
- Status: Lack of citizenship, documentation, credentials, etc.
- Wealth: High entry-level funds required to access financial services
- Location: Vast distance from functioning economies and financial service providers
In a decentralized financial system, a top trader at a financial firm would have the same level of access as a farmer in a remote region of India.
2. Affordable Cross-Border Payments
Decentralized finance removes costly intermediaries to make remittance services more affordable for the global population.
In the current system, it’s prohibitively expensive for people to send money across borders: the average global remittance fee is 7%. Through decentralized financial services, remittance fees could be below 3%.
3. Improved Privacy and Security
In decentralized finance, users have custody of their wealth and can transact securely without validation from a central party. Meanwhile, in the current system, custodial institutions put people’s wealth and information at risk if they fail to secure it.
4. Censorship-Resistant Transactions
In a decentralized financial system, transactions are immutable and blockchains can’t be shut off by central institutions like governments, central banks, or big corporations.
In places with poor governance and authoritarianism, users can divest to the decentralized financial system to protect their wealth. For example, Venezuelans are already adopting Bitcoin to protect their wealth from government manipulation and hyperinflation.
5. Simple Use
Plug and play apps will allow people to intuitively use decentralized financial services without the complexity of the centralized system.
With a decentralized system, a woman in the Philippines could receive a loan from the U.S., invest in a business in Colombia, and then pay off her debt and purchase a home – all through interoperable apps.
The Potential Blue Sky
Unless governments and central banks suddenly cease to exist, it’s difficult to imagine a world where decentralized finance completely replaces their centralized counterparts.
But what if they can co-exist?
Public blockchains can interact with the traditional financial system to create a new hybrid model:
- Users could conduct economic activity on public blockchains and exchange their new wealth into the centralized system.
- Users could hedge against systemic risk by diversifying their wealth holdings in both the central and decentralized system.
Like the internet with knowledge, decentralized finance could help democratize the financial system.
But will we allow it?
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