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Is the Yield Curve Inversion a Cause for Alarm?
Dec 7, 2018 at 03:03 PM
Photo by Pixabay

The Quick Facts

  • The yield curve is a plot that shows bond yields for different maturities on a single graph. The left end of the yield curve shows the Fed's overnight interest rate, and the right end shows the interest rate on a 30-year bond.
  • In most cases, long-term interest rates are higher than short-term interest rates. For example, it usually costs more to borrow money for a decade than it does to borrow money for one year. As a result, the slope of the yield curve is usually upwards.
  • A steep upwards slope can indicate that investors expect inflation and interest rates to rise in the future. This often happens when the U.S. is coming out of a recession.
  • A flatter slope indicates that investors expect slower growth and inflation in the future.
  • A negative slope often indicates that a recession is approaching, and the Fed will have to lower interest rates. An inverted yield curve preceded the dot-com bubble and the 2008 financial crisis.
  • This week, the yield curve experienced its first inversion since 2007, when parts of the front end of the curve flipped to a negative slope.

Food For Thought

Does the yield curve inversion signal an approaching recession?

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