What is Inverted Yield Curve
Inverted yield curve is a downward sloping yield curve in which longer maturity bonds yield is lower than shorter-term bonds yield. The inverted yield curve appears when investors are less confident in economic growth or the stock market and allocate their money into longer-term Treasury as a safe haven during the uncertain environment.
The inverted yield curve seems nonsensical because under normal conditions longer-maturity Treasury interest rates are higher than shorter-maturity Treasury due to the extra risks of time. Long-term securities are exposed to greater risk, the longer period increases the probability of unexpected events.
But during the uncertain environment investing in low-yield government bonds (which is low yield) is still better than losing money to the stock market crash. Additionally, this is the last chance to lock in the current interest rate before the interest rate of newly issued bonds is even lower.
Surging demand raises the price of the long-term U.S. Treasury and causes the long-term U.S. Treasury bond yield to be lower than the shorter-term yield. This is the reason why the yield curve is inverted among investors’ concerns.
To put it simply, the inverted yield curve is an opposite version of the yield curve in the normal economic environment.
The yield curve is a comparison of 1-month, 2-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year, and 30-year U.S. Treasury. The U.S. Department of Treasury provides daily Treasury Yield Curve rates, which can be used to plot the yield curve for that day. The graph’s horizontal (X-axis) is a line of months or years remaining to maturity. The vertical (Y-axis) represents the bond yield.
What does an Inverted Yield Curve Mean?
This means the investors are concerned about future economic growth and the bearish stock market. Concerned investors will allocate their money into longer-term government bonds as a safe haven because investing in low-yield government bonds (which is low yield) is still better than losing money to the stock market crash. When the demand for long-term Treasury is raised, the long-term bond yield is lower (than shorter-term Treasury). This is a reason why the normal yield curve turned into the inverted yield curve.
Since an inverted yield curve is a result of investors’ concerns about future economic weakness. Every recession has been preceded by an inverted yield curve, despite the recession does not start immediately after the inverted yield curve appears.
FAQs
The inverted yield curve is a downward sloping yield curve in which longer maturity bonds yield is lower than shorter-term bonds yield.
An inverted yield curve is a downward sloping yield curve.
Surging demand raises the price of the long-term U.S. Treasury, then it causes the long-term U.S. Treasury bonds yield is lower than the shorter-term yield.
