Read Part 1 if you haven’t yet.
The stock market is nothing more than a prediction machine. It’s like Vegas but with exponentially more money on the line. People invest in stocks when the future of the economy is looking good and they think that the opportunity exists to make better returns in the market than just earning interest on money sitting in the bank.
However, when there are concerns that the near term economy could deteriorate, investors will often pull money out of the stock market and put it into other investment vehicles. There are many options, but bonds are one of those.
During a recession it’s common for central banks to reduce interest rates, which ultimately drives down the rates offered on bonds.
When investors feel that future rates will be lower than the current rates, this drives demand for longer terms bonds (10, 20, 30 year) and as the price for these bonds increase, the yield on them decreases (reread Part 1 if you are lost).
In Part 3 we’ll talk about short term bonds and explain the inversion and why it matters.
#investments #money #investment #opportunity #economy #stocks #yieldcurve