Question

Discuss how useful an inverted yield curve is as an indicator to predict future equity market performance in 2020.

Answer 1

An inverted yield curve is a yield curve which depicts that short term interest rates have exceeded the long term Interest rates and as a result of that , yield curve has inverted.

A normal yield curve reflects that long term interest rates are higher than that of short term Interest rates .An inversion in yield curve reflects an impending recession.

It is a sign of an impending recession as in the long run , people are expecting lower interest rates as they are expecting FED to keep the Interest rates very low in order to stimulate demand which will help in countering recession.

In February 2020, Yield curve has slipped into the negative territory indicating that a recessionary like situation is incoming. It is always a sign taken as a warning signal that an impending recession is on the way.