“An inverted yield curve isn’t a technical indicator like a moving average. Rather, it has real world implications. If you borrow short to lend long, your profit margin is gone.”
— Eddy Elfenbein
You may be hearing talk of the yield curve in the news. The yield curve is a line that depicts the interest rate of US Treasury debt, of equal credit quality but different maturity, at a set point in time. The yield curve shows the difference between short-term and long-term interest rates.
A normal yield curve has an upward slope, with short-term rates lower than long-term yields. That makes sense, as the interest rate should be higher for the uncertainty of events as you go out in time.
An inverted yield curve is one in which long-term yields are lower than near-term yields for debt of the same quality. This is an unusual condition and is seen as a harbinger of economic weakness.
On Monday, the yield for a 6-month Treasury Bill was 2.49%. The yield for a 5-year Treasury Bond was 2.21%.
The Treasury rate is known as the “risk-free” rate, because it is based on “the full faith and credit of the United States of America.”
That concept is what the global financial house of cards is built upon.