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Flat Yield Curve

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A flat yield curve has a small spread between short and long-term rates. The flat yield curve implies that the long-term rate is higher. If the short-term rate is higher, the yield curve is called an inverted yield curve rather than a flat yield curve. An arbitrary definition of a flat yield curve is a spread of 100 basis points between the short-term and long-term rates. In contrast to the flat yield curve, the normal yield curve is steeper. A flat yield curve may be a transition to an inverted yield curve. The inverted yield curve is of far greater interest, as since the 1960s it has been an almost perfectly reliable predictor of a US economic slowdown. Accordingly, speculation about a possible recession tends to be highest among bond traders during a flat yield curve.



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