Inverted Yield Curve

What Does Inverted Yield Curve Mean?

An inverted yield curve occurs when the interest rates on short-term debt instruments are higher than those on long-term ones. Economists view this as a potential indicator of a negative economic outlook, as historical trends suggest that inverted yield curves are often followed by recessions.

Insuranceopedia Explains Inverted Yield Curve

The financial instrument involved in an inverted yield curve is the treasury bond issued by the government. These bonds typically have maturities of 10 to 30 years and are considered risk-free securities because they are backed by the government, the entity that regulates the national economy. However, aggressive trading in the secondary market can drive the price of these bonds lower. When this happens, the typical yield curve, where long-term securities yield higher interest rates, becomes inverted. Historically, such inversions have often been followed by economic downturns, with the most recent example being the 2008 recession.