Question
What is a yield curve, and why does an inverted yield curve sometimes predict recessions?
A. A yield curve illustrates the relationship between bond yields and their maturities, typically using government bonds.
Normally, longer maturities offer higher yields. An inverted yield curve occurs when shorter maturity yields exceed longer maturity yields. This can suggest that investors expect weaker economic growth, declining inflation and future interest rate cuts, which explains its historical association with recessions.