Think about the concept of the yield curve. 1. In what way is an inverted yield

Question

Think about the concept of the yield curve.

1. In what way is an inverted yield curve different from the regular yield curve in an economy? Explain what an inverted yield curve may signal for a country’s economic outlook.

2. Find a news article that describes a yield curve becoming inverted and what this may signal for an economy. Articles can be describing any economy around the world, as long as the article describes an inverted yield curve or some research regarding the occurrence of an inverted yield curve in a particular economy, and what it signified for that economy.

Explanation / Answer

In a yield curve bonds with longer maturity periods have higher yields while in an inverted yield curve bonds with a relatively short maturity periods have higher yields. A normal yield curve is upward sloping indicating increasing yields and economic growth with increase in duration. An inverted yield curve is downward sloping indicating a falling yield with increasing duration.

An inverted yield curve in an economy is an indicator of an impending recession. This is because higher short term yields and decreasing yields with increasing time period suggests that the future is bleak. The inverted yield curve provided an early warning sign before the 2008 recession. The yield curve also clearly indicated an impending recession before the 1991 and 1981 recessions.

Question 2. News article link ---- ( https://www.bloomberg.com/news/articles/2018-04-18/from-citigroup-to-the-fed-curve-inversion-angst-is-intensifying )

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