America's Yield Curve Panic Is Overdone
The financial media seems to be up in arms about the flattening yield curve - the difference between short-term interest rates and long-term rates - and how it supposedly tells us that a recession is right around the corner.
There is a link between the two, but it's not what everyone thinks, and now is not the time to panic.
What Is the Yield Curve?
The yield curve is a snapshot of interest rates for bonds due at various times in the future. A normal, or upward-sloping, yield curve tells us that short-term rates are lower than intermediate-term rates, and intermediate-term rates are lower than long-term rates.
It makes sense that lenders want extra compensation for loaning money for longer periods of time. After all, they will be at risk longer.
However, keeping track of Treasury rates across the
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