IIRC bond-rate curve becomes inverted before the recession. It’s the first sign that the recession is coming. Traders think that 1) stock market may be overvalued; 2) the recession is coming, therefore the Fed will have to lower the rates, so we should lock in high long-term rates; it’s better to invest your money for guaranteed 5% for 10 years ahead of time if you think that yields on 1-year bonds may come down to 2% for a while. Money flows from stocks and short-term bonds into long-term bonds.
This time the curve got inverted in mid-’06 and remained inverted till mid-’07.
