inverted yield curve - I Love Montreal

An inverted yield curve means the interest rate on long-term bonds is lower than the interest rate on short-term bonds. This is often seen as a bad sign for the economy. That’s because long-term rates might go down – inverting the yield curve – if markets expect that the economy will deteriorate and that the Fed will cut short-term rates in the future. (Recall that one factor that determines the yield curve is market expectations for future Fed policy.) Alternatively, markets could be anticipating very low inflation or even deflation in the years ahead, also negative for the economy. But those aren’t the only possibilities: An inverted yield curve could reflect a shrinking of the term premium.

One measure commonly cited by Wall Street analysts compares the yield on two-year and 10-year treasuries. On Friday, April 1, [color=var(--t-color-text-wysiwyg-link)]the yield on the two-year was slightly higher (2.44%) than the yield on the 10-year (2.38%).

Often. The chart below shows the slope of the yield curve since 1976, measured as the rate on 10-year Treasury debt minus the rate on 2-year Treasury debt. When the line dips below zero, interest rates on longer-term bonds are lower than shorter-term bonds, i.e. an ‘inverted’ yield curve. Notice that every time over this period that the yield curve has inverted, a recession has followed.