negative yield curve investment & finance definition

What should investors do when short-term rates exceed long-term rates?

By its very existence, a negative yield curve should be viewed as a market consensus or prediction that interest rates are going to fall, because the market in general has commanded a higher yield for short maturity periods than it has required to attract investment dollars for longer maturity periods. A negative yield curve is usually followed by a flattening and then by a positive yield curve. When this happens, yields on short maturities would probably fall substantially. This shift could occur for various reasons. For example, it could happen as a result of the market coming to expect an easing of inflation; then, yields on longer maturities would also be expected to decline. The longer the maturity, the greater the profit potential for a given decline in yields.

Stephanie G. Bigwood, CFP, ChFC, CSA, Assistant Vice President, Lombard Securities, Incorporated, Baltimore, MD