Short-term rates exceed long-term, often predicts recession
Inverted yield curve
Short-term rates exceed long-term, often predicts recession
An inverted yield curve occurs when short-term debt instruments yield more than long-term bonds. This phenomenon is unusual because bonds with shorter maturities typically offer lower yields than longer-term bonds. To confirm an inverted yield curve, compare the yield on a 10-year U.S. Treasury bond to a 2-year Treasury note or a 3-month Treasury bill. If the 10-year yield is less than either the 2-year or 3-month yield, the curve is inverted.
Example
If the yield on a 10-year U.S. Treasury bond is 2%, while the yield on a 2-year Treasury note is 2.5%, the yield curve is inverted.
Understanding an inverted yield curve is crucial as it often signals an impending recession.
Related concepts
Yield curve
Yield curves show interest rates across different maturities
Deflated Sharpe ratio
DSR penalizes upside volatility as much as downside
Risk-free rate
Risk-free rate inferred from zero-coupon Treasury bonds (T-bills)
Beta (finance)
Beta measures a stock's volatility relative to the market
implied volatility tells you
Implied volatility indicates the market's expectation of future price movement
Interest rate
Raising interest rates makes borrowing more expensive
Educational content, not financial advice.
One email a day: 5 concepts + the 5 stories that matter →
Swipe through 100 ML concepts daily
Open TickerNews