The latest data is not promising. International institutions such as the OECD , IMF and World Bank have all recently downgraded their growth forecasts for the current and upcoming year. Every postwar recession in the US was preceded by an inversion of the yield curve, meaning that long-term interest rates had fallen below short-term interest rates, some 12 to 18 months before the outset of the economic downturn. In general, the interest rate must reflect the riskiness of the borrower and the type of investment that is carried out.
The time structure of the loan also matters. Governments issue debt with very different maturities – from short-term Treasury bills in the US that mature within one year or less to long-term bonds, which can have maturities of two years to 30 years. Some countries like France and Spain even have government bonds with a duration of 50 years. Usually, interest rates on long-term bonds are higher than interest rates on short-term bonds, leading to an upward sloping yield curve.
This is because investors need to be compensated for the extra risk they bear when investing in long-term securities. During economic booms, interest rates usually tend to rise. In that case, the so-called yield curve inverts and is downward sloping.
Click here to read the full article