Economics, retrospect: inverted yield curve

Self-tutoring about economics: the tutor mentions the idea of inverted yield curve.

An inverted yield curve means that the interest rate is higher on short-term bonds than long-term. Supposedly it’s a fairly rare situation (six times since ’78).

The reason inverted yield curves get people talking, as I understand, is that it’s counterintuitive. People generally expect to earn more on money they commit for longer.

With an inverted curve, it may make less sense for a business to borrow money. Theoretically, investors are drawn to the sure thing of relatively higher interest on short-term bonds. Money should become more scarce as it flows into them. Therefore, the economy may expand less quickly – or even contract.

Back in the early 90s, I recall some friends, who followed the markets more closely than I did, discussing the idea of an inverted yield curve. One even suggested that he thought one was coming. While it seems that, perhaps, it came close around ’95, it didn’t actually happen until ’98.

Looking short term rather than long? You might not be alone.

Source:

advisorperspectives.com

msn.com