INVERTED YIELD CURVE
An inverted yield curve occurs when longterm yields fall below short-term yields. Under this abnormal and contradictory situation, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve may indicate a worsening economic situation in the future. In addition to potentially signalling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. That’s because, even if there’s a recession, a low bond yield will still be offset by low inflation. However, technical factors – such as a flight-to-quality or global economic or currency situations – may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. That was seen in 1998 during the long-term capital management failure, when there was a slight inversion on part of the curve.