What Is a Flattening or Inverted Yield Curve?

By Impala Market Team

When people talk about the yield curve flattening or inverting, they’re referring to the relationship between short-term and long-term interest rates on government bonds — and it can tell us a lot about how investors feel about the economy.

Here’s a simple breakdown:

📉 Types of Yield Curves

• Normal Curve: Long-term bonds (like 10Y, 15Y, 20Y) usually pay more interest than short-term bonds (like 2Y, 5Y) — because you're locking your money away for longer.

• Flattening Curve: The difference between short and long-term yields shrinks. For example:

  • 2Y = 15.75%, 15Y = 17.00% → Spread = 1.25% (steep)

  • Later: 2Y = 16.00%, 15Y = 16.20% → Spread = 0.20% (flat)

• Inverted Curve: Short-term bonds pay more than long-term ones. For example:

  • 2Y = 17.00%, 15Y = 16.50%

🚨 What Does It Mean for the Economy?

1. Investor Worry About the Future

A flattening or inverted curve usually means investors expect slower growth, a recession, or interest rate cuts in the future. They’re saying:

“I want to lock in long-term returns now — because I think things might get worse.”

2. Tight Money / Rising Short-Term Rates

If short-term rates rise (maybe because of inflation or central bank policy), but long-term rates don’t rise as much — it can cause the curve to flatten or invert.

3. Signals About Borrowing and Lending

Banks borrow short-term and lend long-term. A flat or inverted curve means:

• Lower profits for banks, which can lead to less lending

• Tighter credit, which slows down business investment and consumer spending

📍 In Uganda’s Context (April 2025):

If yields on short bonds (2Y, 5Y) stay high, but long bonds (15Y, 20Y) don't rise or even fall, it could mean:

• Investors think inflation or interest rates will drop later

• There’s uncertainty or fear about the future economy

• The central bank (BoU) might be seen as keeping short-term borrowing costs too high, risking a slowdown

🧠 Bottom Line:

• Flattening = caution

• Inversion = warning

It’s not a guarantee, but historically, inverted yield curves have preceded recessions in many countries.

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