Question

Explain what an inverted yield curve is, how does it happen, and what does it indicate?  

Answer 1

An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.

An inverse yield curve predicts lower interest rates in the future as longer-term bonds are demanded, sending the yield down.

As investors flock to long-term Treasury bonds, the yields on those bonds fall. They are in demand, so they don't need as high a yield to attract investors. The inverted yield curve is what happens when investors are bidding for longer-term bonds — thus driving down their yields — because they are pessimistic about the short-term prospects for the economy.