A situation where shorter-term bonds offer higher yields than longer-term bonds, which is the opposite of the normal pattern. This unusual condition sometimes occurs when investors expect economic trouble ahead and want the safety of locking in rates on long-term bonds.
An inverted yield curve might show a 2-year Treasury bond yielding 5% while a 10-year Treasury yields only 4%. This reversal can signal that investors are worried about the future and willing to accept lower long-term returns for the security of locked-in rates.
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