I having trouble understanding this. What goes up must come down? i get that when the fed raises rates it is to tame inflation. Inflation getting too high can lead to a recession, but those rates come down eventually? If investors were worried about future economic outlook why bother buying short term bonds? If rates continue to get higher wouldnt they lose money regardless?
However
I am also thinking investors are taking advtange of the higher interest rates, there fore buying short terms bonds to lock in profit?
Please help
In: Economics
So the yield curve is just a representation of what interest rates look like over time. Usually the longer you need to borrow money for the higher interest rate you’ll pay to account for more risk. This is why when you draw a line showing interest rates over time it usually looks like a curve upwards, this is the yield curve.
In some circumstances, usually when you expect interest rates in the future to come down, it can be cheaper to borrow money for longer periods than for shorter periods. When this happens and you draw a line showing interest rates over time, it slopes downwards instead of up. This is called an inverted yield curve.
For long parts of history, when the yield curve becomes inverted it’s been a sign that a recession is coming, but this hasn’t held recently. While interest rates have been very high over the last few years people have been expecting rate cuts and this inverted the yield curve and caused a lot of people to predict a recession which hasn’t and probably won’t come.
As for the relationship between inflation and interest rates, when inflation gets high and the fed wants to bring it down, they’ll increase interest rates to make it more expensive to borrow money. This will mean people have less money to spend and will reduce demand, bringing down inflation.
This is as ELI5 as I can get it. Maybe someone else can make it simpler
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