| nov 22 2006 | | Inverted Yield Curve. | Should we worry about an inverted yield curve? In past, apart from a very few exceptions it has heralded a recession. Even those few exceptions produced periods of market stagnation. A bond yield curve is inverted when the return on money invested for the long term pays less than money invested for the short term. Why would the opposite be the norm? Well, when you invest for the short term there are many fewer variables than when you invest for the long term. Therefore you would expect to be paid more for the long term as you are taking on more risk.
It is different this time. This is the explanation given by financial experts as to why we should not worry about an inverted yield curve. Canada has an inverted yield curve, so has the United States and now European government bonds have joined the party. So what looked like a North American recession is fast becoming a global event. Not that anyone should be surprised now that financial markets and economies are so interdependent.
Rising interest rates and global recession all point to a long period of deflation.
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