Redrick Terry:
It is time now for 4 Your Money. We’re joined by Nate Kreinbrink of NelsonCorp Wealth Management. Nate, welcome back.
Nate Kreinbrink:
Appreciate you having me again, Redrick.
Redrick Terry:
Absolutely. We’re glad you’re here. We’ve heard a lot of talk about flattening the curve as it relates, of course, to the coronavirus outbreak, but there’s another flattened curve that NelsonCorp is paying a lot of attention to, so what can you tell us about that?
Nate Kreinbrink:
Yeah, so the curve that we’re referencing is the U.S. Treasury yield curve, and we started paying particular attention to this in the middle of 2019 as this curve began to flatten. Now, when I say flatten, what I’m referring to is longer term interest rates and shorter term interest rates coming closer together, and this is usually caused when the Fed raises shorter term interest rates while the longer term interest rates, which are set by the markets, remain either flat or begin to fall.
Nate Kreinbrink:
And now we look at the fall of 2019, this yield curve actually became inverted or turned negative. When we have this type of an event, it usually helps signal that there’s future economic trouble that’s on the horizon. When we have longer term interest rates actually becoming lower than shorter term interest rates, it’s an indicator that there could be recession-like symptoms coming up in the next six months to a year. We had this triggering event in the fall of 2019. Now we fast forward to where we currently are at, and we obviously find ourselves now in a recession-like environment, although it hasn’t quite been defined yet.
Redrick Terry:
Yeah, certainly. And that’s what the yield curve suggested. So is that the end of the story here? Is there more to it?
Nate Kreinbrink:
No, obviously there’s more to it. And I think we’ve got an image that kind of helps illustrate some of these points here. But interest rates, and in particular, yield curves, like the one that’s on the chart that we’re showing here, play an important part as to showing us where we’re at in economic cycles. The chart also shows by the gray columns where we’ve also had those recession-like times historically. The bottom yellow dotted line shows the zero bound range, and whenever the yield curve goes below that line, goes below zero, goes into negative, we have that inversion, like we happened back in the fall of 2019. And if you look at prior to the majority of historically of the recessions, that yield curve has fallen below that zero line. And just like the yield curve kind of leads us into those recessions, it can also lead us out, and we call this steepening of the yield curve.
Nate Kreinbrink:
And now if you look at the top yellow line, which is represented by the 2% mark, now, this means that the difference between the short term interest rates and the longterm interest rates is 2%, which historically has shown that that’s a stable and good economy once we get past that 2% rate, which makes sense, because if I lend some people money, the longer I lend it to them, I would hope to get a higher percentage on my loan to them as far as the interest on that.
Nate Kreinbrink:
Now we look at going above that 2% range is normally an indicator that we’re back to somewhat normal times. However, it’s important to keep in mind that the last two recessions, that steepening of the curve has been closer to 3% rather than the 2% before we actually have hit that mark. If you look at currently where we are at there, well below 1%, I think it’s pretty straightforward to say that we’ve got some time to go yet before we start getting back to any what of a normal situation in the economy.
Redrick Terry:
Telling information for sure. Nate, thanks, as always, for joining us. We appreciate your time. And if you missed any part of this discussion, we will make it available to you in OurQuadCities.com.