An inverted bond yield curve is when shorter term bonds yield more than longer term bonds. This is counter intuitive because bonds should yield the opposite of this–why get paid more for a shorter term bond? The Federal Reserve puts short-term bond rates higher to hold inflation back and simultaneously the market holds back long-term bond rates as well. The inverted bond yield curve is occuring right now. Odds are that the Fed will lower short-term rates sometime in 2007. With this the inverted yield curve will go back to normal.
How do bond investors combat this inverted yield curve? Certificates of Deposit is an idea. A longer term CD might give you the yield you desire and avoid the problems with bonds currently. Beginning a ladder of Bonds and/or CDs could help as well. This method fights off the probelms of an inverted yield curve and any other issue with bonds and CDs by spreading out the maturities. By having several of these with differing maturities you will avoid low yields and then when yields rise you can try to take advantage of the better rates.