"A
normal yield curve slopes upward, demonstrating the additional yield investors typically demand in exchange for a longer maturity date," Fossier said."When interest rates for bonds with a longer maturity trade at a lower yield than bonds of a shorter maturity, the relationship is said to be inverted."
It will more likely be a matter of when and not if the 2-year and 10-year Treasury invert unless the Federal Reserve intervenes by cutting rates and forcing a
normal yield curve.
Line A represents a
normal yield curve where long-term rates are higher than short-term rates.
When Will the United States Return to a
Normal Yield Curve?
They can then invest a core portion of their portfolio in longer-term securities, such as a 2-year Treasury note, to take advantage of higher yields in a
normal yield curve environment.
A sixty basis-point distortion in the coupon curve (in this example a linear inversion from two years to thirty years, which would manifest itself into an eighty-three basis-point distortion in the zero coupon curve) reduces the value of that cash flow stream by 6.7 percent relative to a
normal yield curve.
