Why you need to know about the inverted yield curve

Why you need to know about the inverted yield curve
Typically, long term government bonds have higher yields than short term bonds to compensate for the added risk of tying up investor money for a longer period. This normal, upward sloping yield curve, reflects the expectation that the economy will grow over time, and inflation will increase.
An inverted yield curve occurs when short term interest rates on government bonds are higher than long term interest rates. This indicates a negative outlook on the economy. Inverted yield curves are historically associated with economic recessions. The expectation is that central banks will be forced to lower interest rates to counter an economic downturn. The expectation for interest rates being decreased in the future results in the long term yields dropping and this creates the inverted yield curve.
Economists, policymakers, investors, and regular people like you and me should monitor and consider an inverted yield curve as a potential indication that the economy will contract. While it does not guarantee a recession, it is a warning sign, and an important tool to be considered.
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