THE PERVERTED YIELD CURVE:

The yield curve is a visual representation of how much it costs to borrow money for different periods of time; it shows interest rates on U.S. Treasury debt at different maturities at a given point in time.

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Lenders and bond investors who commit to tying up their money for longer periods of time take on more risk because it's harder to forecast economic conditions - inflation, Federal Reserve policy, the global economy - over a decade than over the next week or month. The compensation that lenders and investors demand for making long-term loans is known as the term premium. With a positive term premium, the yield curve usually slopes upwards.

The Federal Reserve influences short-term interest rates across the economy by targeting the federal funds rate, the interest rate at which banks lend to each other overnight and a benchmark for other interest rates in the economy. Longer-term interest rates reflect, among other things, market expectations about how the Fed will move short-term rates in the future.

Inflation erodes the value of any promise to pay a fixed sum in the future, including interest payments on a bond or loan. Investors and lenders demand compensation for this by building an "inflation premium" into the interest rate on a loan or bond.

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