InvestorQ : There has been a lot of scare in global markets about inverted yield curve in the US. What is inverted yield curve and why is it a concern?
Riya Dwivedi made post

There has been a lot of scare in global markets about inverted yield curve in the US. What is inverted yield curve and why is it a concern?

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rhea Babu answered.
1 year ago


In the last few days there has been lot of talk over an inverted yield curve. Obviously, this is not a normal occurrence and is being interpreted in the market as a signal of an impending slowdown in the global economy. In the past, the inverted yield curve has resulted in a recession after a gap of 1-2 years. Here is what inverted yield curve really means.

The yield curve measures the relation between term to maturity of bonds and the yield on these bonds. Normally, the longer the tenure, greater is the risk. Hence long maturity bonds quote at higher yields than shorter maturity bonds. Actually, the word inverted yield curve itself is a misnomer. An inverted yield curve does not mean that the shape of the yield curve is inverted. What it means is that the yield on the 10-year bond or the yield on the 5-year bond has fallen below the yields on the 2-year bond.

In the last few days this trend was visible for the fourth time in the last one year. US bond yields dipped below 1.55% and went below the 2-year bond yields. When long term yields go below short term yields, it is an indication of caution among bond investors who are almost unwilling to take a long term view. This is seen as indicative of an impending economic slowdown. Each time the yield curve inverts is not necessarily a signal of slowdown. There could be other reasons too for an inversion of yield curve and they could also be a temporary adjustment of liquidity.