Drockton Report Articles
Yield Curve Inversion and Rate Hikes
Notice that the 2 year Treasury is Paying 5.04% and the 10 Year is Only Paying 3.97% This is a Yield Curve Inversion.

The Yield Curve shows the relationship between different forms of Government Debt. The shorter the term of the debt, the lower the interest rate is supposed to be. For example, the two year Treasury should pay less interest than a 10-year treasury. The reason is that the longer you let the government use your money, the higher the yield should be.

The rates are determined at auction. When buyers are concerned about higher rates coming they will be the short-term debt (IE: 2 year treasury). They do this because owning a longer-term treasury debt, like the 10 year, will cost you money.

If rates are at 8% today, and the government raises them to 8.5% then the holders of all existing debt will have to discount them to make up for the rates. No one wants to buy a 10 year Note paying 8% when they can buy a new one paying 8.5%. So, the seller of the lower interest rate note has to reduce the value of his debt .5% for every year left on it.

For example, I have a 100,000 Ten year paying 8% interest. The Fed raises rates to 8.5%. My note has 9 years left before it matures. I have to discount that note .5% for every year left before maturity. Or, $500 per year left. I just lost $4500 if I try to resell that debt.

As you can see, no one wants to take a loss, so investors bid on the 2 year Treasury instead of the 10 year. That way they minimize their loss to $1000 if they are forced to sell.

This explains the inversion of the Yield Curve, whereby the 10 year note is paying a lower rate of interest than a 2 year treasury.