Why the yield on the long term bond is less than the yield on short term bond?

Question

Normally the yield on longer term bond is higher than the yield on short term bonds.

Answer 1

The yield on the longer term bond usually is higher than short term bonds because of the risk one takes with long term is greater than risk with short term. So for taking higher risk long term bonds have higher yields.
Now your question why it inverts. Certain point in the Economy feels the economy is going into a recession. Then they demand more short term bonds for avoiding risk of long term investment and switch to short term bonds. Investors won't be able to predict how long the recession will last and how long they need to stay invested long term. So the rates invert for having the long term bonds with no demand and short term bonds picking up demand.

Answer 2

It's called an inverted yeild curve. It is indicative of a future recession. It means the the long bonds are selling themselves through uncertainty in the market. And short bonds are needed to be at a higher rate to entice buying there. It is similar to a bookie in gambling. If too many bets are being placed with the Colts +7 vs the Pats then you have to make it less attractive and make it Colts +8 to win and eventually it will settle at equalibrium at Colts +9 and equalibrium is found.
In this case the long bond is being bought more than the short. The short then edges up in rate and the long comes down a bit. Still no buyers? The make the long bond an even lower rate and the short an even higher rate. Well eventually the short and the long will sell at equalibrium. In this case the short needed a higher rate.
Psychologically that means that the investor feels that they would rather tie their money up for 5 years at a set interest rate than to put the money into a shorter term investment for a higher. It also means that they would rather get say 4.95% for 5 years gauranteed than an uncertain stock market return. It has preluded recessions successfully everytime (and led as a false indicator a couple of times as well though)

Answer 3

Normally it is so because banks can not predict the future of ecnomy of more than one year. If economy goes down, they will have to suffer because of loss in giving higher interest.

Answer 4

That inversion is usually created by lack of faith in the future economy.