Definition
Yield Curve Inversion
A yield curve inversion occurs when short-term bond yields exceed long-term yields, historically one of the most reliable warning signs of an approaching recession.
Normally longer bonds yield more than short ones to compensate for time. When the curve inverts, with the 2-year US Treasury yielding more than the 10-year, it signals that markets expect rate cuts ahead due to a slowdown.
The US 2s10s inversion has preceded most modern recessions, making it a closely watched global indicator. For India, a US recession signal can mean weaker export demand, risk-off flows and rupee pressure, even though the Indian G-sec curve has its own dynamics.
Related terms
- Yield Curve ControlYield curve control is a policy where a central bank targets a specific level for longer-term bond yields, buying unlimited bonds as needed to hold the cap.
- Sovereign Credit RatingA sovereign credit rating is a global agency's verdict on a country's ability and willingness to repay its debt, shaping how cheaply that nation and its companies can borrow abroad.
- Term PremiumThe term premium is the extra yield investors demand for holding a long-term bond instead of repeatedly rolling over short-term bonds, compensating for future rate and inflation uncertainty.
- RecessionA recession is a significant, broad-based decline in economic activity lasting more than a few months, often defined as two consecutive quarters of falling GDP.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.