Reply To: Long term rates and the yield curve


An inverted yield curve, i.e., when short rates are above long rates, is associated with downturns.

Here is a short piece by Bob Murphy showing that inversions occur because short rates spike upward relative to long rates.

Here is a paper by Murphy explaining the yield curve, see section IV.

Because of arbitrage across the yield curve, normal movements in long rates tend to be matched by movements in short rates. Since the Fed manipulates the short end of the yield curve, the abnormal steepening and flattening typically occur from short rate movements not long. Take a look at figure 2 on p. 33 of Murphy’s paper.