IN­VERTED YIELD CURVE

Finweek English Edition - - Openers -

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.

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