Question

For what reasons did the yield curve become inverted in recent months? Explain.

Answer 1

Answer:

Given yield curve become inverted in recent months

Reason:

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.

Explanation:

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.

Conclusion:

Hence based on the above reasons we conclude that "yield curve become inverted in recent months".