Definition
The term inverted market is used to describe a condition where spot prices are higher than the long-term price of a futures contract. An inverted market is considered an abnormal market condition.
Explanation
When the price of a futures contract trading in the near term is higher than the equivalent contract with a longer term to expiration, the market is said to be inverted. Typically, futures contracts are more expensive the longer the term to expiration. This is due to carrying costs, which result in a price premium for longer-term contracts.
Inverted markets can develop when the supply of the underlying asset is short or restricted. This shortage drives up demand in the near term, while the market expects the relationship between supply and demand to return to a more normal condition over time. That is to say, the shortage of supply is only a near term concern.
Related Terms
The term carrying charge market is used to describe a condition where spot prices are lower than the long-term price of a futures contract. A carrying charge market is considered a normal market condition.
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