What Is an Inverted Yield Curve and How Does It Impact You?
An inverted yield curve is a term used in finance to describe a situation where short-term interest rates are higher than long-term interest rates. Typically, the yield curve slopes upward, indicating that investors demand higher returns for tying up their money for longer periods. However, in an inverted yield curve scenario, this relationship is reversed. The yield curve is created by plotting the yields (interest rates) of various maturities of bonds on a graph. For instance, a common comparison is between the 2-year and 10-year Treasury bonds. When the yield on the 2-year bond is higher than the yield on the 10-year bond, the yield curve is said to be inverted. An inverted yield curve is often seen as a warning sign or indicator of potential economic trouble. Historically, an inverted yield curve has been associated with an impending recession or economic slowdown. So, how does an inverted yield curve impact your financial or investment management plans? Let’s begin with interest r...