![](https://web.archive.org/web/20220719220219im_/https://upload.wikimedia.org/wikipedia/commons/thumb/3/32/Inverting_-_Flattening_yields.webp/300px-Inverting_-_Flattening_yields.webp.png)
![](https://web.archive.org/web/20220719220219im_/https://upload.wikimedia.org/wikipedia/commons/thumb/2/26/Positive_Yield_Curve.webp/300px-Positive_Yield_Curve.webp.png)
![](https://web.archive.org/web/20220719220219im_/https://upload.wikimedia.org/wikipedia/commons/thumb/f/f5/FFR_treasuries.webp/300px-FFR_treasuries.webp.png)
In finance, an inverted yield curve happens when a yield curve graph of typically government bonds inverts in the opposite direction and the shorter term US Treasury bonds are offering a higher yield than the long-term Treasury bonds. Longer maturity bonds usually have a higher percent yield return because they are more risky because of volatility in the market, there could be a Liquidity trap that wouldn't allow an investor to sell the bond security on the secondary market over the long run and they could get stuck with an underperforming asset. The inverted yield curve is one of the most reliable leading indicators for economic recession since at least 1955. The US Federal Reserve uses open market operations to adjust the Federal funds rate which pushes up short term bonds to catch the longer maturity bonds which are rising to catch up to inflation during the flattening of the yield curve.[2] The inversion of the yield curve tends to predate a recession 7 to 24 month ahead of time.[3][4]
History
The term 'inverted yield curve' was coined by the Canadian economist Campbell Harvey in his 1986 PhD thesis at Duke University.[5]
Business cycles
The inverted yield curve is the contraction phase in the business cycle or credit cycle when the federal funds rate and Treasury interest rates are high to create a hard or soft landing in the cycle. When the Federal funds rate and interest rates are lowered after the economic contraction (to get price and commodity stabilization) this is the growth and expansion phase in the business cycle. The Federal Reserve only indirectly controls the money supply and it is the banks themselves that create new money by fractional-reserve banking when they make loans. By manipulating interest rates with the Federal funds rate and repurchase agreement (repo market) the Fed tries to control how much new money banks create.[6][7]
Other countries inverted yield curve
![](https://web.archive.org/web/20220719220219im_/https://upload.wikimedia.org/wikipedia/commons/thumb/5/5d/Germany_Inverted_Yield_Curve.webp/300px-Germany_Inverted_Yield_Curve.webp.png)
See also
References
- ^ "US Treasurys". CNBC. September 25, 2012.
- ^ "Flat Yield Curve". Investopedia.
- ^ "What Is an Inverted Yield Curve?". Investopedia.
- ^ Bruce-Lockhart, Chelsea; Lewis, Emma; Stubbington, Tommy. "An inverted yield curve: why investors are watching closely". ig.ft.com.
- ^ https://faculty.fuqua.duke.edu/~charvey/Research/Professional_Materials/Term_Structure_May_17_2011.pdf[bare URL PDF]
- ^ "Here We Go Again: The Fed Is Causing Another Recession". Mises Institute. June 21, 2022.
- ^ "Reference Rates - FEDERAL RESERVE BANK of NEW YORK". www.newyorkfed.org.