Episode Summary Lending money for ten years should pay more than lending for two because of the greater uncertainty over time. But when the yield curve inverts, short-term lending pays more. This episode decodes the curve, its three shapes, and the bond market expectations that drive this famous recession signal.

Key Concepts

• The Baseline Curve: By plotting the yields of Government of Canada bonds at every maturity (from three months to thirty years), we isolate time as the only variable because credit risk is constant.
• Three Primary Shapes:
  • Normal: Upward-sloping where longer maturities yield more due to greater long-term uncertainty and investors' preference for liquidity.
  • Flat: A transition state representing similar yi ...