The yield curve is a very good indicator of things to come.
An inverted yield curve is when long bonds are yielding/paying less than shorter term bonds.
These are market driven rates, all except the overnight rate that is set by the FED.
The question is why would anyone buy a 30yr bond that pays less than what they could earn overnight?
Answer: Because those short term rates are likely to drop, (reinvestment risk)and they need to capture what they can while they can.
People need to know that the Bond Market is substantially bigger than the Equities market. The Bond market is where the so-called “Safe Money” is invested.
The spread between short and long bonds has compressed as the safe money is still looking for a home.
It’s not likely to actually “Invert” with FED funds (overnight) at 25 basis points, but may invert between the 7yr and 30yr.
We are in somewhat uncharted territory.
I contend that if the yield curve inverts between the 5-7yr and 30yr bonds, and stays inverted for a number of months, than we are in for a whole lot of trouble.
To put this in perspective and in some historical context, I recommend this website.
http://stockcharts.com/freecharts/yieldcurve.php
Dynamic Yield Curve
They have data back to 1999 that compares, side by side, the S&P to the yield curve.
Just click on the S&P chart to set the “start time” and hit animate.
Please note;
There was a time between 2002 and 2006 where the US stopped issuing 30yr bonds.
You should look at the 20yr during that period.