Candlestick Trading Blog

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What Is An Inverted Yield Curve?
Like the signals you can find when you trade stock, the investment timing of an inverted yield signals a potential change of direction of the economy. An inverted yield curve occurs when short-term Treasury note yields are higher than long-term Treasury bond yields. When this occurs, it means that investors are more favorably inclined to purchase 10-year Treasury bonds, at a lower yield, than 1-year Treasury bonds. Such trading and investing can reveal a trader’s technique for dealing with periods when it is less secure to trade stock and a variation on one’s trading plan is necessary.

With this trading system, investors believe they will make more by holding onto the longer-term bond than if they kept buying and reinvesting in short-term bonds or trading stocks which will return much less in the near future. While this seems illogical because long-term investing is usually rewarded with better interest rates since investors don’t have access to this money. However, if investors think that the economy will be slowing over the next couple of years, and then speeding up again in the long-term future, they will be content to tie up their money until then.

Part of learning how to invest is knowing the signals behind such moves. In this case, an inverted yield curve suggests a move towards a recession, hindering those who normally trade stocks. This phenomenon occurred just before the recessions of 1981, 1991 and 2000. If making money investing in stock is possible, it suggests to many economists that there is enough liquidity in the economy to prevent a recession. The inability to successfully trade stock can be a strong indicator to many analysts that the economy is headed for a downturn.

Can Investing In Bonds And Trading Stock Co-Exist?
These types of investing seem so different that it’s easy to understand such a question. The truth of the matter is that these two investment philosophies SHOULD be used together. They are the “yin and yang” of portfolio diversification. In a strong portfolio, speculative investments should be offset by stable, long-term investments. That way, if an investor loses his or her speculative ventures, the long-term investments are there to stabilize the portfolio.

When you trade stock or invest in bonds like this, you are following the basics of defensive investing. This discipline focuses on a strategy that works over years and doesn’t get overly excited about short-term highs and lows. Speculative investments are balanced by trade options that are lower yield, but lower risk as well.