Is an inverted yield curve significant?
An inversion of the yield curve is a unique situation not only because of its rarity (except in Britain) but also since it undermines the idea that investors will receive additional compensation for taking additional levels of risk. In the UK, an inverted yield curve has been the norm for many years. This is because of the limited amount of long-dated bonds available and the strong demand from institutional investors, particularly pension funds as they seek to match their long-term liabilities. The excess demand over supply pushes up the price of long-dated bonds and forces down the yield. In the US, however, an inversion in the yield curve is not the norm and is therefore a significant development. Some market commentators consider the yield curve to be a robust indicator of economic growth and it is considered a leading economic indicator by some financial commentators. Indeed, an inversion of the yield curve has preceded every recession in the US since 1950 apart from one. Q: What c
