The Yield Curve: Important Sign For The Economy

In normal times, the yield curve is upward sloping where short-term interest rates are lower than long-term interest rates. This bodes well for the economy because lenders are willing to lend money longer term because they get paid to do so. When the yield curve is flat or inverted, lenders are unwilling to lend longer term because they are not paid to do so. In the past 2 weeks, the yield curve was improving going into the election. The day after the election, the curve began to flatten. This was due to concerns that we would see a more restrictive COVID policy and less stimulus from a Republican controlled Senate. Just a few days later, the yield curve steepened as positive news of Pfizer’s vaccine brightened the outlook for the economy. Monitoring the shape of the yield curve can provide early warning signs for the economy.