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Nothing in economics is super easy to ELI5, but the short answer is since the market always trends upward, longer term investments should always return more in interest. If longer term investments are giving lower interest rates than short term investments, that is an indicator that investors believe the market will decline. Longer answer: The yield curve shows the interest rate you can expect for a certain timeframe of investment. For example, if you buy a 1 year bond, you can expect a 2% return. If you buy a 5 year bond, you can expect a 5% return. If you buy a 10 year bond, you can expect a 7% return. Since you won't be getting your money back for 10 years, you get more interest. Longer term investments are generally considered more stable, since the markets always trend upwards over time. But if investors do not feel comfortable in the stability of the market long term, the yield rates go down. So if I have a 1 year bond at 1% interest, a 2 year bond at 0.7% interest, a 5 year bond at 0.5% interest, and a 10 year bond at 5% interest, that indicates investors are expecting the market to decline in the next two years. The market will recover within 10 years, but it will go down in the short run. Remember the market always trends upward, so if longer term investments are worth less than short term investments, it's a predictor that the market is expected to decline. |