Question

What is a “normal” shape for the Yield Curve for USA Treasury Bills?  What is meant by an “inverted” Treasury Bill Yield Curve?  Why the yield curve is often “inverted” just before an economic downturn or recession begins?

Answer 1

Yield curve is a graphical representation showing interest rate during different contract periods , the slop of yield curve gives a picture of future interest rates. US treasury bills has an upward sloping yield curve. The yield curve is of upward shape normally for the US Treasury bills.

An inverted yield curve represents a situation where short term instruments is having higher yields compared to the long term instruments of same credit risks. This type of curve are very rare to witness. The yield curve may get inverted even before a recession on economic turndown inorder to notify the investors about the recession or economic turn down approaching. Investors expect to earn higher yield on long term instruments than short term instruments. The inversion in yield vurve also suggest the investors that the Federal reserve may cut the short term interest rates.

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