Inverted Yield Curve
A yield curve on which short-maturity yields exceed long-maturity yields.
Formula
Test: yield on a short maturity, such as two years, exceeds the yield on a longer one, such as ten years
Unit
%
In depth
Inversion means the market is pricing lower rates in the future than today, which typically follows tight monetary policy and expectations that it will be loosened. It has preceded most recessions in the United States, a relationship widely cited and much less reliable outside that market — the Indian curve has inverted without a recession following. The lag between inversion and any downturn has varied from months to years, which makes it unusable for timing anything. It is a description of relative pricing across maturities, and this dictionary makes no prediction from it.
Worked example
A two-year yield of 7.4% against a ten-year at 6.9% is an inversion of 50 basis points. A lender is being paid more to commit for two years than for ten, which is the opposite of the usual arrangement.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Inverted Yield Curve” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.