Expert: Doug Ingram - 11/18/2011

Question
Sir I have a question about negative or inverted yield curve.

I know it happens when long term T bonds have low yield as compared to short term. I want to ask what cause this to happened?

thank you!
Sonia

Answer
There is not a single answer.  However, negative yield curves usually occur before recessions.

In the mid 2000s, the Fed kept raising rates to slow the housing bubble, but investors kept long rates down (by buying them).  The Fed can only control short rates!  Fed Chairman Alan Greenspan called this a "conundrum".

A negative yield curve is caused by investors believing demand will increase for longer-term securities. If you believe rates will fall, you don't want to be in short maturities.

Others reasons for longer rates falling are the expectations of hard times or deflation.  

(A normal yield curve rewards those that invest longer with greater yield.  More risk = greater reward.)