levered/unlevered and yield curve

[gonowpass]

Fixed income part 2, practive problem 16
Info: because the yield curve is inverted, the cost of both the overnight and the 2-year term repo is higher than the yield on the levered portfolio.
[question removed by moderator]
1. With inverted yield curve, why is the cost of both the overnight and the 2-year term repo higher than the yield on the levered portfolio?
2. Why is the return on the levered portfolio lower than return on unlevered?

 

[MrSmart]

1. Because it is inverted, and the durations of the portfolio are most likely longer than that, then you borrow at a high cost compared to your return.
2. Leverage magnifies the return on equity, but if the cost of leverage reduces the overall return more than the leverage effect, the return on the levered portfolio is less.
I’m going by common sense, I may be wrong.

 

[S2000magician]

If you borrow at a rate higher than you’re earning, you lose money.