Inverted Yield Curve

What is an Inverted Yield Curve?

An inverted yield curve refers to a phenomena in the bond markets where bond securities with shorter maturities actually have higher yields than bonds with longer term maturities with similar credit qualities. Yield curve inversion indicates that long term investors are grim about the future prospects of the economy and thus, are willing to settle for lower long term yields. In the past, this has been a precursor to economic recessions. The reliability of this indicator is still under debate. The last time the yield curve inverted was in 2000 where a recession followed. 1989 also had the yield curve inverted and led to a recession as well; however, the inversion in 1998 did not lead to any recession. For the better part of 2007, the yield curve was inverted and this has many economists believing that a recession is in store. Time will tell.

 

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