An inverted curve is when long-term yields fall below short-term yields.

Inverted yield curve

occurs due to the perception of long-term investors that yields will decline in the future. This
can happen for a number of reasons, but one of the main reasons is an expectation of a
decline in inflation. When the yield curve starts to shift towards an inverted shape, it is
perceived as a leading indicator of an economic downturn.

France yield curve for 1991 -

1991
10

9.5

8.5

7.5
1M 3M 6M 9M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 9Y 10Y 15Y 20Y 25Y 30Y 50Y

We can see that there was an inversion in the French yield curve in the year 1991.
We can see from the above graph that since 1988 growth in the French economy followed
successive years of less growth than the previous years. It also witnessed disinflation since
that year which hit zero in the year 1992. Thus due to the perception of long-term investors
that yields will decline in the future, investors started investing in short term bonds.
At the time France was beginning to experience the positive effects from the drop in world
oil prices. The structural deficit deteriorated further in 1988-90 in the context of buoyant
growth , and the deterioration in the actual deficit resumed with the slowdown in growth that
started in 1991.In the early 1990s, a loose fiscal policy was to a certain extent used as a
substitute for monetary policy, because the latter was assigned to the targeting of the
exchange rate and could not be used for dealing with the recession.