Yield curve inversion
MacroDefinition
When short-term Treasury yields exceed long-term yields. Historically the most reliable US recession signal — every US recession since 1969 was preceded by a 10Y-2Y or 10Y-3M inversion, typically with a 6-18 month lag.
Mechanism: investors price long-term rates lower than short rates because they expect the Fed to cut hard in response to a coming downturn. Inverted yield curves also crush bank net interest margins, tightening credit through the system.
Mechanism: investors price long-term rates lower than short rates because they expect the Fed to cut hard in response to a coming downturn. Inverted yield curves also crush bank net interest margins, tightening credit through the system.
Example
10Y Treasury at 4.0%, 2Y at 4.5% → inverted by 50 bps. The 10Y-2Y inverted in mid-2022; if pattern holds, the recession lag puts a downturn risk in late 2023 to mid-2024 (still being debated whether one occurred).
Related tool
Open the recession tool on Arsenal.finance →