InvestorQ : I hear a lot about the US yield curve inverting; what does that mean?
sarah Leo made post

I hear a lot about the US yield curve inverting; what does that mean?

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Rashi Mehra answered.
1 month ago
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The yield curve is a relationship between tenure and yields. Normally, higher the tenure, higher the risk, so higher the yield. That is why the yield curve is normally upward sloping. However, at times this yield curve can become negative sloping. That is what has happened now. In the last 100 years, this has been an accurate indicator of forthcoming recessions.

A yield curve inversion does not mean that the upward slope becomes downward sloping. The yield curve inversion is measured using proxies. Normally, this is measured as the spread between two maturities. The common proxy for yield curve is spread between 2-year and 10-year bond yields. Last week, the spread on 2/10 became negative i.e. yield on 2-year was more than the 10-year.

Is yield curve inversion a reliable indicator of forthcoming slowdowns? In last 100 years, the inversion of yield curve correctly predicted most recessions with a lag of 18-22 months. The actual length of recession depends on the kind of fiscal and monetary policies adopted.

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