The Yield Curve Inverts
Most economists will tell you, there might be no sign of a pending recession more reliable than the inversion of the yield curve. Of course, it doesn’t help that they seem to be the only ones who really understand what an “inverted yield curve” actually is, but so it goes.
The yield curve refers to a graph of the interest rates on Treasurys (government debt) of varying lengths. Money lent for longer periods of time normally has a higher rate to reflect the increased risk, so the graph usually slopes from lower rates for the short-term debt to the higher rates for the long-term debt.
However, the value of long-term bonds increases significantly when either interest rates or the stock markets drop, and because both those things happen simultaneously during a recession, bond traders start scrambling for the long-term debt when they feel a downturn is looming. That increased demand can eventually push the interest rates on long-term debt below short-term debt — “inverting” the yield curve.
