Question

Suppose we observe a descending (or inverted) yield curve. What does this descending yield curve tell us about the future state of the U.S. economy? Draw an inverted yield curve.

Answer 1

A yield curve is a line that indicates bond yields of the same credit rating but different maturities. The curve path provides an insight into potential change in interest rates and economic activity.

The yield curve is important for two key reasons. In particular, it gives us an insight into the understanding of all investors in the entire economy.
If the economy is not demanding higher rates because of uncertainty about future growth, then banks are obliged to loan money at lower rates.

If long-term yields dip below short-term yields, an inverted yield curve happens.

Technical factors like price flight or global economic and monetary conditions may lead to rising bond demand at the end of the yield curve, which could result in a decrease of long-term rates.

The yield curve has inverted since 1955 before each US recession, although the reverse occur often a couple of years before a recession begins. This correspondence has warned other investors over the previous year as different regions of the yield curve reversed, then steeped and reversed.

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