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INVERTED YIELD CURVE

Uncategorized Aug 28, 2019

Definition

An inverted yield curve (negative yield curve) will slope down to the right to show that the yield is higher for short-term maturities than for longer maturities.

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Why It's Important?

You may have heard all of the talk about the inverted yield curve and an upcoming recession. An inverted yield curve typically occurs when the Federal Reserve has raised short-term interest rates to restrain inflation and to cool down an overstimulated economy. Therefore, people have associated the inverted yield curve with a peak in the business cycle and since the peak has been reached, there is no where left to go but down. This is why it is commonly used to predict an upcoming recession.

To put the talks about a recession in perspective, here is a graph of all the past recessions and their relations to the inverted yield curve:

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As you can see, there were times when an inverted yield curve did not signal a recession so, only time will tell if we are currently in one! My best piece of advice if we are, STAY INVESTED!

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