Inverted Yield Curve

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What is an 'Inverted Yield Curve'

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than 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 to be a predictor of economic recession.

Inverted Yield Curve



Partial inversion occurs when only some of the short-term Treasuries (five or 10 years) have higher yields than the 30-year Treasuries do. An inverted yield curve is sometimes referred to as a "negative yield curve".

BREAKING DOWN 'Inverted Yield Curve'

Historically, inversions of the yield curve have preceded many of the U.S. recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. A recent example is when the U.S. Treasury yield curve inverted in 2000 just before the U.S. equity markets collapsed. An inverse yield curve predicts lower interest rates in the future as longer-term bonds are being demanded, sending the yields down.

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RELATED FAQS
  1. What does the yield curve actually predict?

    Find out what an inverted yield curve represents, how it has performed as a leading indicator and why it appears to hold ... Read Answer >>
  2. How can the yield curve help me make investment decisions?

    Learn about the yield curve, and discover why this chart is an important economic indicator. How do Treasury bond yields ... Read Answer >>
  3. Why are the term structure of interest rates indicative of future interest rates?

    Learn why economists believe the term structure for interest rates reflects investor expectations for future interest rates ... Read Answer >>
  4. What is the difference between term structure and a yield curve?

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  5. Below is an example of US Treasury yields for various maturities ...

    The correct answer is b. A normal yield curve chart shows long-term debt instruments having higher yields than short-term ... Read Answer >>
  6. What is the current yield curve and why is it important?

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