Inverted Yield Curve

An Inverted Yield Curve occurs when the yield offered on Short-Term Bonds exceeds that on Long-Term. The Yield Curve then slops down from Left to Right, which is uncommon and could signal a recession.

The Yield Curve plots the interest rate at the various maturities, short term to long term of Bonds issued by the same country. The broad classification of the Yield Curve is divided into two forms, the Normal Yield Curve and the Inverted Yield Curve. The Inverted Yield Curve is an unusual event where Short-Term Interest Rates exceed Long-Term Interest Rates, thus the Yield Curve slopes down from Left to Right. When a Yield Curve inverts, Bond Investors are possibly looking at the Flight to Quality Trade, pushing Long-Term Rates below Short-Term Rates. There could be several factors causing the inversion. In 2008, it was in response to pending Bank failures or it could be as a response to forecasts of a possible decline in economic activity.