If you’ve invested in certificates of deposit, it’s likely you’ve heard of the negative CD yield curve, which represents a change in how interest rates are applied to short-term and long-term investments. However, if you haven’t heard of it and are interested in investing in CDs, now’s the time to learn more about it.
The Definition of the Negative CD Yield Curve
The negative CD yield curve is also known as the inverted yield curve, and basically is the opposite of the normal yield curve. So what is the normal yield curve? Let’s define it through example. When you invest in certificates of deposit, you have a number of benefits that show themselves in interest rates. One is that the more you invest, the higher your rate is likely to be. The other is that you benefit from making a longer-term investment.
So let’s say you invest $1,000 for 3 months. You are usually going to be offered a lower interest rate than if you invested $1,000 for 5 years. This is because you’re allowing the bank to have access to your money longer. When you see a higher interest rate for the long-term investment this represents a normal yield curve. However, if for some reason the short-term investment offers a higher interest rate, this is considered a negative CD yield curve because the interest rates are moving in the opposite direction.
What Does a Negative CD Yield Curve Mean to You?
So now you’re probably wondering what the negative CD yield curve means to you. For one, it means that either the economy is in the middle – or is about to be in the midst – of a recession and the market is viewing the long-term outlook negatively. Typically, under these circumstances, experts advise customers not to make long-term CD investments until the market stabilizes. Instead, if savings account interest rates are comparable, they suggest possibly taking that route to enjoy greater liquidity at a similar rate.
A negative CD yield curve does not signal the end of the world for certificates of deposit. However, it does signal that you might want to proceed with caution until you have time to better analyze when the market will shift back to normal, as well as how your long- or short-term investments would be affected in the process.