Inverted yield curve

[modhatter]

Can someone explain to me in plain English what an "inverted yield curve is" and what causes it?

 

[REWahoo]

Can someone explain to me in plain English what an "inverted yield curve is" and what causes it?

Basically it's when short term interest rates are higher than long term interest rates. As Wikipedia describes it:


Inverted Yield Curve

An inverted curve occurs when long-term 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. However, technical factors such as a flight-to-quality or global economic or currency situations may cause demand for bonds on the long end of the yield curve causing rates to fall. This was seen in 1998 during the "Long Term Capital" failure (slight inversion on part of the curve).

For more, see http://en.wikipedia.org/wiki/Yield_curve

 

[kenepp1]

I don't know all the details, but it is because the short term bond is paying a higher interest rate than longer term bonds are.