what an inverted yield curve means for the economy?
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An inverted yield curve is thought to be a good predictor for an upcoming recession. This makes some logical sense; it might mean that investors are trying to beef up their short-term cash reserves, which is not a good sign.
In practice, this predictive power is weak. There have been both false positives and false negatives in recent history.
Some people claim that inverted yield curves have always been followed by recessions. This is only technically true because there is no specific time frame attached to that claim. It is analogous to predicting that Joe Biden will die but not necessarily in office.
Ok, first: what’s a treasury bond?
A treasury bond is basically where you give the US government some money, and in exchange they promise to pay you back after some specified period (e.g. 3 months, 2 years, 10 years, or 30 years) plus interest.
Normally, the longest-term bonds have the highest interest rate (the “yield”) and shorter-term bonds have lower yields. When you plot this on a graph, with the maturity time on the X axis and the interest rate on the Y axis, it always slopes up. An “inverted yield curve” is when part or all of the graph slopes down because shorter-term bonds are paying *higher* rates than long-term ones.
Some believe that an inverted yield curve is a predictor of an imminent economic recession. Others dispute that conclusion, or say that it isn’t true anymore as of the last few years.
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