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Inverted Yield Curve

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An inverted yield curve is one where the most long-term rate is not highest. A completely inverted yield curve has the short-term rate highest; a humped or partially inverted yield curve has some intermediate rate highest. The term inverted yield curve can mean either case. Since the 1960s the inverted yield curve has been a nearly perfect leading indicator of a forthcoming US economic slowdown. Since then, every slowdown has been preceded by an inverted yield curve. Only once has a slowdown failed to materialize after an inverted yield curve emerged. Bond traders know this, so the flat yield curve that must precede an inverted yield curve takes an importance, too. Market speculation about the potential for an inverted yield curve (read, recession) escalates as the normal yield curve flattens.



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