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The Yield Curve Makes Headlines – But What Does It Mean for Your Finances?

Courtesy of Pam Martens

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity

By Pam Martens and Russ Martens

Over the past week, everyone from the New York Times to Mother Jones is writing about the yield curve – a topic previously considered so esoteric by newspaper editors that only an economic nerd of a reporter would dare suggest writing a story about it.

The concern today is that the yield curve (a measure of short, intermediate and long-term interest rates) is getting very close to inverting. An inverted yield curve occurs when short rates are higher than longer term rates. Under normal circumstances, an investor should be rewarded with a higher yield for taking greater risk in buying a longer-dated bond since future inflation would erode his purchasing power from the interest payments on the longer bond over time.

At Wall Street On Parade, we’ve been calling our readers’ attention to what’s happening with the yield curve since November of last year for the simple reason that an inverted yield curve is an economic window into the future of the U.S. economy (reliably predicting past recessions including the 2001 meltdown and the epic collapse in 2008-2009). When the next recession hits, it will come at a time of unprecedented debt levels in the U.S. and a Wall Street banking sector that has, once again, loaded up on opaque derivatives exposure. That raises the stakes for more Wall Street bank implosions and, as a consequence, it raises the stakes for your financial well being.

Getting your personal finances in shape now to protect yourself and your family is a prudent course of action. That includes having adequate savings to see you through a potential job layoff and getting credit card debt under control. It also means minimizing risk in your 401(k) and/or other retirement accounts by not having all of your nest eggs in the stock market or risky corporate bonds.

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