What Does the 10 Year Yield Curve Tell Us About Real Estate?
As you probably already know, the U.S. Treasury yield curve is the most important curve an investor should follow. It's the benchmark debt for any other obligation on the market. As such, it's often used to predict any upcoming changes in economic output and growth.
The possible changes in the economy are essential for real estate as well, which is why we wanted to discuss the current 10-year yield curve. Before we get into that, let's first explain the curve a bit more. It will help you understand why what it says about the real estate market is crucial to know.
The Three Types of Yield Curve Shapes
With that in mind, there are three main types of yield curve shapes:
· The normal yield curve – here, the longer maturity bonds possess a higher yield when compared to short-term bonds. The simple reason is that time is a risk with bonds.
· The flat yield curve is also called the humped yield curve, and it's where the short and long-term yields are very close to each other. This could be an indicator of an economic transition.
· The inverted yield curve is the very opposite of a standard yield curve. It means that short-term yields are much higher than that of long-term yields. Such a curve is an excellent indicator that a recession could hit soon.
The current 10-year yield curve is an inverted one, and many feel that a recession will hit the market relatively soon.
The Indications for the Future
The spread between the 10- and 2-year spreads is usually vast. That means that the 10-year rate is, in most cases, much higher than the 2-year rate. It's a reasonable occurrence as investors are compensated well for the higher risk they are taking with longer-term bonds.
However, the spread is no longer as big as it was. For the past two years, it kept narrowing and reached its lowest point in December 2018. At that point, the Treasury yield curve inverted once again. That was a first, ever since the last recession of 2008 happened, or the now-famous 2008 financial crisis.
The curve inverted some two years before the crisis, and it also inverted before the recessions of 1981, 1991, and 2001.
All of this could mean that the next recession is going to hit us soon, but the strength of the economy is not suggesting the same.
Whatever the case may be, research suggests that when the curve inverts, it usually takes around 22 months for the recession to hit.
It's essential to take note of all of this, but it doesn't mean that we should all believe a new recession is now a certainty. An inverted yield curve is only a warning sign, not a sure indicator.
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The shape of the yield curve is the most important part. It shows us what has been happening and gives us an idea of what changes in economic activity are likely to