Yield curve
Fixed IncomeDefinition
The yield curve plots Treasury bond yields across maturities from 1 month to 30 years. Its shape is one of the most powerful economic indicators because it reflects the bond market's collective expectations about growth, inflation, and Fed policy.
Normal curve (upward sloping): Long-term rates are higher than short-term. Investors demand more yield for locking up money longer. Signals healthy growth expectations.
Flat curve: Short and long rates are nearly equal. Transitional state - the market is uncertain about the future.
Inverted curve: Short-term rates exceed long-term rates. This has preceded EVERY US recession since 1955 with only one false signal. When short bonds pay more, the market expects the Fed to cut rates - which only happens when the economy weakens. The 2Y-10Y spread is the most watched: when it goes negative, the average lead time to recession is 12-18 months.
Normal curve (upward sloping): Long-term rates are higher than short-term. Investors demand more yield for locking up money longer. Signals healthy growth expectations.
Flat curve: Short and long rates are nearly equal. Transitional state - the market is uncertain about the future.
Inverted curve: Short-term rates exceed long-term rates. This has preceded EVERY US recession since 1955 with only one false signal. When short bonds pay more, the market expects the Fed to cut rates - which only happens when the economy weakens. The 2Y-10Y spread is the most watched: when it goes negative, the average lead time to recession is 12-18 months.
How it works
Yield curve shapes
NORMAL
Healthy growth
FLAT
Uncertainty
INVERTED
Recession signal
Example
July 2022: The 2Y yield hit 3.2% while the 10Y was 2.6% - a -60bp inversion, the deepest since 2000. The curve stayed inverted for over a year.