negative yield curve

Negative yield curve

When the yield on a short-term security is higher than the yield on a long-term security, partially because high interest rates are creating a greater demand for short-term borrowing.

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negative yield curve

An unusual relationship between bond yields and maturity lengths that results when interest rates on long-term bonds are lower than interest rates on short-term bonds. Negative refers to the downward slope of the curve that is drawn to depict this relationship. Also called inverted yield curve. Compare positive yield curve.

What should investors do when short-term rates exceed long-term rates?

By its very existence, a negative yield curve should be viewed as a market consensus or prediction that interest rates are going to fall, because the market in general has commanded a higher yield for short maturity periods than it has required to attract investment dollars for longer maturity periods. A negative yield curve is usually followed by a flattening and then by a positive yield curve. When this happens, yields on short maturities would probably fall substantially. This shift could occur for various reasons. For example, it could happen as a result of the market coming to expect an easing of inflation; then, yields on longer maturities would also be expected to decline. The longer the maturity, the greater the profit potential for a given decline in yields.

Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD