The investment field is filled with odd terms that you may not have complete knowledge of. One such term is the Inverted Yield Curve, of which most people do not have a proper understanding. However, if you are a part of this investment industry, you must know the inverted yield curve and how it can impact you.
You know that yield curves relate to increased interest rates, bond coupons, and dividend payments. But in this financial situation, you need to know what happens when the yield curve inverts. You can know more about the yield curve’s effects inversion from institutions such as columbia bank colonia.
What is the inverted yield curve
The yield curve becomes inverted when the yield for longer duration bonds falls below the yields for the bonds of shorter durations. This means that a 3-year bond may have a higher yield than a 5-year bond. The more the gap between the yield percentages becomes less, the more serious its impact on the economy.
What does an inverted yield curve mean
When an inverted yield curve happens, the economy is hit with a recession more often than not. There has always been a history of recession when the yield curve inverted. For example, after introducing the 2-year treasury, America has been hit by five recession periods, all happening after the yield curve inversion.
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Why does an inverted yield curve happen
There is no single reason for the inversion of the yield curve. It is a combination of different financial factors. However, two major forces cause the yield curve to invert.
The first is the rise in short-term yields due to the increase in the rate of Fed Funds. The second is economic concerns leading to a fall in the long-term yields.
The government has been trying to take control of these two major factors since the inverted yield curve will have a drastic effect on the economy, as people have already experienced in the past.