Last Updated on December 28, 2021 at 6:43 pm
We are living in a time where half a data point is enough to announce trends, patterns prophecies. Every week one guy says the markets are going to tank and another says it will do well. The latest such development is the so-called inversion of the US bond yield curve and its association with the onset of recessions. While it is not as simple as that, it was enough to cause worry and fear. Since those will not help, why not use this as a wake-up call to ensure you are prepared for what follows in a recession?
First, let us discuss what is this fuss all about. The yield of a bond is defined as its annual interest payment divided by the current price. When the demand for a bond increases, its yield decreases. So suppose I compare the yields of a 1Y bond and a 10Y bond.
If the yield of the 10Y bond is higher, it means its demand is lower. Suppose the yield of the 10Y bond is less than the 1Y bond. This means that investors prefer short-term bond or fixed-income investments and prefer to invest their money because they believe it will provide higher returns.
What if the investors are no longer confident about the medium-term or long-term prospects in the stock market? They would prefer long-term bonds even if their interest rate is low. Then the yield of the 10Y bonds (in this example, long term in general) would start falling (as prices increase) and at some point fall below the 1Y yield.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! 🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
A yield curve is a plot of the yield of all the bonds in the market (vertical axis) and their duration. As explained in this article, The Bond Yield Curve as an indicator of what’s going on with the economy, these are three simple (simplistic?) possibilities
For the last few months, US long-term bond yields have been falling lower than short-term yield resulting in an inverted yield curve. This means turbulent stock markets, difficulty in running businesses, layoffs etc. In other words, a recession.
Not immediately though. It has taken months to years for the US recession to set in after the yield curve inversion. See this article for example. As investors, it is hard to act on such events and assume it is time to pull out money. There is no need to as long as we have invested with the right asset allocation. As money managers, however, this is a wake-up call to check how strong our financial situation.
Are you ready to handle a Recession?
A recession can be a double-whammy: Job loss (and difficultly in getting re-employed), plus a stock market crash fall. The situation in India is a bit different as we have a big array of small saving instruments reasonably insulated from bond yield movements because of politics and an entitled population. Nonetheless, considering the spending habits of the current generation, it does not hurt to check.
Here are some questions to ask
- If I lose my job, how long can I live off my investments without factoring in the severance package? The answer should be at least one year. A cash holding of 6-12 months expenses (including EMIs) is mandatory. So start building it. Do not ask where to invest. Grow up and hold it in SB or FD of a “safe” bank (meaning one that the government will bail out)
- Do I have the skill set to be re-employed within six months? (if you had that, would you have been laid off in the first place, I don’t know, just asking). The longer it will take to get re-employed, the larger your emergency fund should be.
- Can I freelance or do something on my own? If not, work on it now! Do not wait! This video series and this article How to Make More Money In India: Forty real examples may be of some help.
- If the market crashes or if there is a recession, will my short term goals (five to at least seven years) suffer? If the answer is yes, then pull out all associated money from the market and put in safe instruments. Debt instruments are not “safe”!
- Do I have a separate health cover? If I am suddenly laid off, will I be able to transfer my group cover to an individual cover during such a time? Answer no and buy a separate cover.
- Do I have life insurance? Why is this important in a recession? Guess!
It is never too late to start. Download Re-assemble: Step by step money management basics for beginners
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)