A normal yield curve is the one for which the long-term yields are fairly priced compared to the short-term rates.
The normal yield curve depends on the short term interest rates and on the implied volatility of interest rates.
The term differential of interest rates can be, thus, considered as an interest rate risk premium.
The closer short-term rates to 0%, the higher the volatility of interest rates the steeper the normal yield curve.
A steep yield curve is steeper than the normal yield curve.
An inverted yield curve is less steep than the normal yield curve.
Hence although a yield curve seems steep it can be, according to my definition, inverted.
This is especially true when the short-term risk free rate is 0%.
Otherwise obviously, there would ever be an inverted yield curve for short-term risk free rates = 0%.
I call the Yield Curve of Keynes' Liquidity Trap the normal yield curve that goes through (0, 0%).
I call The Crash Trigger the yield curve when The Crash Occurs.
The Yield Curve of Keynes' Liquidity Trap and The Crash Trigger.
Yield Curve of the US Treasuries
In green the Yield Curve of Keynes Liquidity Trap. In orange The Crash Trigger.
For someone not using my model they both seem very steep, don't they?
