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Inverted Yield Curve: Understanding the Formula of Inverted Yield Curve

What Is an Inverted Yield Curve

An Inverted Yield Curve is a line graph that represents the fact that the long-term debt instruments amount to less interest than the short-term ones. It is a yield curve that is downward-sloping. These are also referred to as Negative Yield Curves.

Understanding the Inverted Yield Curve

The curve refers to the line graph that has sloped the other way around from the yield curve, hence, the inversion. Short-term investments yield more profit than long-term ones. The line graph expressing it has “maturity” along the horizontal axis - x and the “yield” along the vertical axis - y in a graph chart.

Here, the interest rate is inversely proportional to the maturity timeline and it can be expressed mathematically as given below -


Interest rate     1 / Maturity term


In the United States of America, an inverted yield curve has almost always had the potential to lead to a recession. Many take the exact hint from all inverted curves and foretell a recession. In turn, it actually means is that many investors believe that the short-term interest rates are to fall in the near future which is often caused by the recession.


Use of the Term in Sentences

  • Inverted yield curves are often taken to be the hint to predict the end of the business cycle which cannot always be accurate solely based on the slope of yield curves.


Category: Economics
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