inverted yield curve investment & finance definition

A rare situation in which short-term interest rates are higher than long-term rates. An inverted yield curve occurs when there is strong demand for short-term credit, which drives up the demand for Treasury bills and other short-dated credit. During periods of strong inflation, the Federal Reserve raises interest rates, which tends to invert the yield curve; long-term rates remain low because investors are reluctant to make long-term commitments. An inverted yield curve suggests an unhealthy economy that is racked by high inflation. A normal yield curve is called a positive yield curve.