Inverted Yield Curve

Inverted yield curve

When short-term interest rates are higher than long-term rates. Antithesis of positive yield curve.

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inverted yield curve

See negative yield curve.

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Inverted Yield Curve

A yield curve in which the long-term yields on bonds are lower than short-term yields. A normal yield curve trends upward because bondholders expect a larger interest rate for a longer investment; however, if a yield curve turns negative, it indicates that the market believes that demand for long-term debt securities is increasing or will increase, which will drive yields downward. Higher demand for bonds usually occurs when investors believe that stock prices will fall. As a result, an inverted yield curve is a highly bearish indicator and indeed is seen as a predictor of a coming recession. An inverted yield curve is the rarest yield curve. It is also called a negative yield curve.

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Inverted Yield Curve

What Does Inverted Yield Curve Mean?

An interest rate environment in which long-term debt instruments have lower yields than do short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered a predictor of economic recession. Partial inversion occurs when only some of the short-term Treasuries (5 or 10 years) have higher yields than the 30-year Treasuries; an inverted yield curve sometimes is referred to as a negative yield curve.

Investopedia explains Inverted Yield Curve

Historically, inversions of the yield curve have preceded many U.S. recessions. Because of this historical correlation, the yield curve often is seen as an accurate indicator of the turning points of the business cycle. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down.

Related Terms:
• Interest Rate
• Treasury Bill—T-Bill
• Treasury Bond—T-Bond
• Treasury Note
• Yield Curve