Inverted Spread

An inverted spread is a spread that goes against the grain...against market norms. In normal markets, we’d expect to see greater rewards for investors holding assets longer. Which means that long-term assets generally will have higher expected yields than similar, short-term assets.

Inverted spreads happen when this reverses...when short-term assets have higher expected yields than longer-term assets. An inverted spread is when the spread between assets with two different time horizons (where you subtract the shorter one from the longer one) is negative.

If you had a 10-year bond that yielded 5% and a 30-year bond that yielded 4%, then you’d have an inverted spread by 1%.

See: Inverted Yield Curve.