Part 2/8:
The yield curve represents the difference between long-term bond yields, such as 10-year Treasury bonds, and short-term yields like those of 2-year bonds. Typically, longer-term yields are higher, resulting in a positive yield curve. However, an inversion occurs when short-term yields exceed long-term yields, often as a result of the Federal Reserve's interest rate hikes designed to cool down the economy.
Historically, an inversion typically leads to reduced lending by banks, inevitably resulting in economic contractions. The steepening of the yield curve—often signaling the start of interest rate cuts due to a softening economy—should follow this pattern.