Inverted Yield Curve

See: Yield Curve.

Most of the time, yield curves look like...yield curves.

But think about an era where the government is desperately fighting inflation, and it raises short term borrowing rates massively. This actually happened in the 1970s when Vietnam’s war economy...coupled with a bunch of other elements...produced roaring inflation in the US.

So the Fed then raised short term rates into the double-digit zone, but most investors believed that these very expensive short-term rates would stop people from borrowing and buying stuff. Like...think about your credit card charging you 25%-a-year interest. It’ll make you think twice about putting that belly button ring set at the mall on your Amex.

So when people stopped buying things on credit, i.e., they bought a lot less, the economy cooled, the Fed then lowered rates and the yield curve went back to normal. But for a while, the curve was inverted, that is, it started with short-term rates very high and then longer term rates were cheaper.

And, as you might be able to guess, somewhere in the middle there, as the curves cross over, there is a short period where the yield curve is pretty flat. That is, the price of renting money is the same whether you're borrowing for 3 months or 30 years; it’s the same 3.5% rent.

So now you’ve got curves, and uh, you know how to use them.