What does it mean if a yield curve is inverted?

An inverted yield curve occurs when short-term interest rates are higher than long-term interest rates. This phenomenon often signals investor pessimism about the economy's near-term outlook, suggesting that they expect economic slowdown or even recession. In such conditions, investors may prefer to lock in longer-term investments despite lower yields, driving down the interest rates for long-term bonds due to increased demand.

The implications of an inverted yield curve are significant. It often reflects expectations of declining inflation and lower future growth rates, influencing decisions in investment and financial planning. Understanding that short-term yields surpass long-term yields helps investors interpret market sentiments and adjust their strategies accordingly.

This rationale is why the statement reflecting that short-term yields are higher than long-term yields aligns with the definition of an inverted yield curve.