What is a yield curve, and what does it mean when it’s inverted?
In simple terms, the yield curve shows the price of borrowing money in the bond market. In a “normal” yield curve, long-term yields are higher than short-term yields. This makes sense because the longer someone borrows your money, the more you would expect them to pay you.
People fear inverted yield curves because they tend to precede recessions. To say that an inverted yield curve signals an economic slowdown is imminent is an oversimplification. But it does point to a risk in our current financial system: A flatter yield curve can hurt lenders’ profits and stability and their willingness to lend. We don’t recommend that investors retool their portfolios just because the yield curve is not following its normal path but, it’s not a bad idea to check in on whether your portfolio is well positioned to weather a rough patch.