Eli5: How can the price of a 10 yr T bond be a predictor of recession? What is the relationship between price and rate?
In: 80
“Price” and “rate” of a loan are essentially the same thing. Take a $100 loan, you’ve got to pay off $105 in a year. That costs you $5, the rate is 5%. But these are bonds, so you’re the one making the loan. You’re loaning the government money, and they pay you back more, later.
If the rate of a US federal treasury bond is high, the government needs money and will raise rates until it sells enough.
10 year T notes typically have a higher rate than 2-year bonds. They’re riskier because they tie up your money longer.
Currently… that’s inverted. Because investment people are getting the hell away from bond (forcing the government to sell them at a higher rate). The short term bond market reacts faster than the 10 year market. Bonds are a nice safe thing to do with money, as long as there’s not inflation or big market changes. But if there’s a crash coming, you want cash on-hand because that’s the time to invest, not locked up in bonds.
Real long story short: **Investors are collectively predicting an economic down-turn and are avoiding buying bonds.**
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