The Yield Curve - Why It Matters To You and How It Might Predict Recessions

The yield curve, one of the key statistics that economists and investors use to try to divine the future course of the economy, is simply a measure of the difference between the interest rates on short-term loans (or bonds) and those on long-term loans (or bonds).

Under normal economic conditions, interest rates on short-term loans are lower than on long-term loans. This is because there's less risk that a company such as, say, General Motors will default on its debts in the next 30 days than there is that it will go belly-up in the next 30 years. There is also less risk that inflation will eat into the value of money repaid on a loan in three months than on a loan that is repaid three decades from now. Continue reading...