Unit 3 · Level 1 · Interest rates
The yield curve
Line up interest rates by loan length (3 months, 2 years, 10 years, 30 years) and you get the yield curve. Normally it slopes up: locking money away longer earns more. When it flips upside down, markets are whispering something about the future, and Wall Street leans in.
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What you get asked
The yield curve is a chart of…
Same borrower (usually a government), different maturities. The shape of that line packs in the market's whole macro outlook.
Why are long-term rates normally higher than short-term ones?
Ten years of tied-up money means ten years of inflation surprises and missed opportunities. Lenders charge a 'term premium' for that.
When short-term rates rise above long-term rates, the curve is said to be ___.
Inversion means markets expect today's high short rates to be cut later. Usually that's because they smell a slowdown.
How an inversion becomes a recession signal: put it in order.
The curve doesn't cause the recession. It reflects thousands of investors betting rates will need to fall.
Honest reading: an inverted yield curve means a recession is…
The US curve inverted before most recessions of the past 50 years, but lead times ranged from months to two years, and no signal bats 100%. Treat it as a caution light, not a crystal ball. 🐜
The rest of this unit
The price of money: how one number ripples through everything you own.