belgiumnl
Credit investing glossary

Inverted yield curve

A yield curve represents the relationship between bond yields – interest rates – of bonds with the same credit quality across different maturities, at a specific point in time. In short, it indicates what it costs to borrow money over time. It is a graphical representation of the term structure of interest rates, and reflects market expectations of future economic conditions and changes in interest rates.

The yield curve historically has been upward sloped under conditions of normal or positive economic growth. That is, long-term yields typically are higher than short-term yields, owing to the so-called maturity risk premium: lenders demand higher returns on long-dated debt to compensate for the uncertainty of holding debt instruments for longer periods of time. 

At certain points in the economic cycle, yield curves flatten and can even slope downwards. A downward- or negatively sloped yield curve is referred to as an inverted yield curve.

Consistently at the forefront of credit management
Consistently at the forefront of credit management
Credit investing

What drives this slope inversion and why is it such a closely watched phenomenon? Market watchers tend to fear yield curve inversion, as it historically has been a leading indicator of economic recession. When economic growth deteriorates and investors believe a contraction is looking, they would be wary holding debt on the shorter end of the maturity spectrum. This is based on the view that companies and government agencies may have more difficulty servicing debt in the next two to five years, say. As investors shun short-term debt in favor of longer-term debt, short-term yields rise and long-term yields decline. The result is a downward-sloping yield curve.

The US Treasury yield curve is an example of a yield curve that is used extensively in practice. It plots the yields on instruments issued by the US government, ranging from one-month bills to 30-year debt. A much-watched portion of this yield curve is the two-year-to-ten-year curve. Changes in the slope of this curve is considered a leading indicator of turns in the US economic cycle, which has repercussions for global markets.

Central bank watcher: Different worlds
Central bank watcher: Different worlds
Not all global policymakers are in a rush to remove the punch bowl.
20-12-2021 | Visie
Quant modeling can use non-numerical data, too
Quant modeling can use non-numerical data, too
We find that text analysis can predict the risk and return characteristics of corporate bonds.
10-12-2021 | Visie
The capex costs of reaching the Paris goals
The capex costs of reaching the Paris goals
We use green bond reporting to compare the environmental impact of a range of green projects.
06-12-2021 | Visie
Logo

Disclaimer

De informatie op deze website is uitsluitend bedoeld voor professionele partijen. Een professioneel belegger is: een belegger die beroepsmatig over voldoende kennis, deskundigheid en ervaring beschikt om de financiële risico’s van de zelf genomen beleggingsbeslissing(en) adequaat in te schatten.

Bezoekers van deze website dienen zich ervan bewust te zijn dat zij zelf verantwoordelijk zijn voor naleving van alle in hun eigen land geldende wetten en voorschriften.

Door op Akkoord te klikken, bevestigt u dat u een professionele belegger bent. Indien u op Niet akkoord klikt, wordt u doorverwezen naar de omgeving voor particulieren.

Niet akkoord