The bond market is generally considered as the smartest market. The Fed only controls the very short end, they dont control the yield curve beyond that (it is supply/demand).
So VERY simplistically and not 100% mathematically correct, say you buy a 10 year bond $100 that yields 2%, so you expect to receive $20 over time for the bond.
A year later you need to sell but rates have gone up 1%, so an investor buying would get 3%, not 2%, so $30 and not $20. So they are not interested in buying your bond, UNLESS you sell it a price (i.e. loss) that makes up the interest rate difference. Even if you dont sell, you will have a mark to market (paper) loss. Year to date, bond investors have lost over 10% on their holdings.
The reason that an inverted yield curve (short end is higher than the long end) freaks people out is that if investors are willing to receive less for a longer maturity, it means they expect rates to come down, which means they expect a slowdown/recession, which its what has always happened. Remember the bond market is the smartest market.
Hopefully that is understandable.
