Part 2/8:
An inverted yield curve occurs when short-term interest rates are higher than long-term rates, traditionally signaling economic downturns. Such a phenomenon had not only emerged but persisted for an extended period, making it the longest-lasting inverted yield curve in history. However, recent developments indicate a transition back to a standard yield curve, where short-term rates are lowest and rise with maturity.
The Role of Long-term Interest Rates
The real driver behind this return to a typical curve is the rise in long-term interest rates since September 2024, coinciding with the Federal Reserve's decision to cut short-term interest rates. This increase appears counterintuitive at first glance, as one might presume rate cuts would lead to lower long-term borrowing costs.