A yield curve is a graph with yield duration on the x-axis and interest rate on the y-axis. With a
normal yield curve, bond holders are awarded with higher interest the longer that they allow the
borrower to borrow their money. For an example of a normal yield curve, the interest rate on a 2 year
loan is lower than the interest rate of a 10 year loan. The normal yield curve makes sense to most
people because you would expect that the longer dated loan has more risk. If you are letting someone
hold your money longer, you would expect to get a higher interest rate than someone who is only
willing to loan out their money for a short time.
When the yield curve inverts, you have the opposite situation. The longer you loan out your money,
the lower your interest rate. Why would this happen? Who would agree to this? If people think that a
recession is looming, they will accept lower yields to protect their capital. As demand for bonds
increases, the yield drops.
The current yield curve is a partial inversion. The 10 year bond is trading slightly below the 2 year,
but the 30 year continues to hold up the long end of the curve. If inflation in the U.S. shows some
strength, the yield curve should normalize.