Inverted Yield Curve Signal - Quant Trader Interview Question
Difficulty: Medium
Category: Finance
Practice quant interview questions from top firms including Jane Street, Citadel, Two Sigma, DE Shaw, and other leading quantitative finance companies.
Topics: yield-curve, economics, recession, interest-rates
Problem Description
The yield curve is a graphical representation of yields on similar bonds across different maturities. It's typically upward sloping, reflecting the idea that investors demand a higher return for lending money over a longer period. However, sometimes the yield curve inverts, meaning short-term yields are higher than long-term yields.
Question: What economic condition does an inverted yield curve most strongly signal, and what is the primary reason for this signal?
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