Yield The Years: Implications of the inverted yield curve

What exactly is a yield curve, and how does it relate to investing?

A yield curve is a mode to track the difference between interest rates and the investment return from buying short and/or long-term debt. Banks usually demands higher interest terms the longer the timer period.

Now, a yield curve goes flat when the premium for long-term bonds reaches zero. If this turns negative, the short-term debt product yield is higher than the longer maturity debt. This makes the curve to invert.

The current scenario

All over the world financial markets because of their nature and how they operate often can provide vital clues as to how the economy can be expected to fluctuate. These predictions and anticipations is possible because financial markets is a reflection of the individual views of millions of investors who are not only making forecasts but who are backing up their opinions with sizable investments. In this regard the yield curve is an indicator which is held in high esteem in financial circles. It is not only investors who are concerned about the yield curve because even Federal Reserve officials will frequently bring up the topic. Likewise many wire service headlines dealing with finances will refer to the yield curve in their frequent reports. The same is true for investment and other financial blogs where both experts and amateurs are always willing and eager to share their opinions. Nevertheless if the yield curve is so important to economist what could the average citizen learn about this phenomena and what can they do about it?

A basic definition

For everyone interested in the topic the yield curve provides people with a visual representation of how much it is likely to cost the government to borrow money from international financial institutions over different time periods. The yield curve will also show interest rates which is charged on U.S. Treasury debt and it looks specifically at different maturities and their position at specific points in time. Furthermore another way to look at the yield curve is that it refers to the critical relationship between the long and the short term interest rates especially on fixed income securities which is one of the services provided by the U.S. Treasury. Now then when an inverted yield curve is observed it indicates that short-term interest rates are now exceeding long-term rates. The possible impact on the economy is worrisome and over the decades an inverted euchre has become an important indicator as far as economic health is concerned.

From an investor’s viewpoint

It should be understood that short-term interest rates are in most cases somewhat lower than those which apply to long-term rates and therefore an upward sloping yield curve can be expected which will indicate to economists that there is higher yields that could be expected on long-term investments. This phenomenon is known in economic circles as a normal yield curve. Occasionally however it can happen that the spread between long-term interest rates and those of short-term ones narrow somewhat and when this occurs one can expect to see a flatter yield curve. The flat yield curve is something which occurs during the transition period between a normal healthy yield curve and an inverted yield curve. Financial data collected over many decades have shown economists that an inverted yield curve is very often a reliable indicator that an economic recession may be looming on the horizon.


The implication of all this information especially as far as investment is concerned is that when short-term interest rates start to exceed the rates of long-term investments than the general opinion in financial markets will be that long-term investment outlooks will not be favorable and likewise the yields which can be reasonably expected from a long-term fixed income can be expected to perform very poorly.

A yield curve inversion preceded the tech bubble and latest crash. You must know there has been some false alarms regarding this as well, This is not investment law and you should not make financial decisions on this alone. News media sells mayhem and fear, do not be guided by this.

Written by:
Alex Lopez
Posted on:
April 5, 2019