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The US yield curve: Risks of inversion

The 10-year bond has been a good proxy for the natural or neutral rate for many years. This may not be so now

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Illustration: Binay Sinha

Akash Prakash
Recently most market observers have been very worried about a possible inversion of the yield curve in the US. The yield curve plots the rates and maturities of debt instruments on a curve and is conventionally used as a measure of the difference between short-term interest rates and long-term interest rates. The two classical definitions of the Treasury yield curve are the gap between 10-year bond yields and three-month treasury bills (10-year/3-month) and the gap between 10-year yields and two-year bond yields (10-year/2-year). The yield curve is tracked closely as it has the best long-term forecasting record of any macroeconomic
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