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What is a yield curve inversion and why does it matter?


Bonds Economics Politics

Businessman pointing at screen showing inverted yield curve

Most economists have an opinion about reliability of an inverted yield curve in determining the future of a country’s economic growth. But for those who didn’t study economics, it can be quite a confusing measure. This short overview should help you understand what it means and why it matters.

There are three little words which never fail to send financial commentators into a spin: inverted yield curve. That is understandable. Every US recession since the Second World War has been preceded by an inverted yield curve, when the yield on short-term treasuries moves ahead of the yield on long-term treasuries, indicating that investors have little confidence in the economy. This has led the curve being described as “a barometer of global financial health” and even “a catalyst for recession”.

In 2019, the curve is teetering on the brink, meaning we’re hard pressed to go a day without reading of the impending doom of the global economy.

It’s not hard to see why predictions are so sombre. In 2006 and 2007, the yield on 3-month US treasuries rose higher than 10-year yields. The following year, the US property market crashed, unwinding the financial system and leading to the global financial crisis and a prolonged recession in many counties. In 2018, the…

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