Yield curve explained

Q: What does an inverted yield curve mean?

Long-term rates below short-term — market pricing future Fed cuts.

Q: How reliable is yield curve as a recession predictor?

T10Y2Y inversion has preceded every US recession since 1955 with 12–18 month lag.

Normal, flat, inverted — and the recession signal everyone watches.

TL;DR

The yield curve plots Treasury rates at different maturities. Normal curve slopes up. Inverted (long < short) has preceded nearly every US recession since 1955.

Three shapes

Each tells a different story.

→Normal — long > short. Expansion conditions.
→Flat — long ≈ short. Mid-cycle, growth uncertainty.
→Inverted — long < short. Late cycle; bond market pricing future cuts.

Recession indicator

T10Y2Y has inverted before every US recession since 1955. Lag from inversion to recession is usually 12–18 months.

Why traders care

Beyond predicting recessions, the curve drives everything.

→Bank margins — banks borrow short, lend long. Flat/inverted squeezes margins.
→Equity rotation — steepening favours cyclicals; flattening favours defensives.
→FX — steeper curves often outperform on growth optimism.
→Real estate — long-end drives mortgage rates.

Worked example

Reading the 2024 yield curve

Snapshot of US Treasury yields.

13-month5.30%
22-year4.30%
35-year4.10%
410-year4.25%
530-year4.40%
6T10Y2Y-0.05% (slightly inverted)
7T10Y3M-1.05% (deeply inverted)

Takeaway

Inversion at both ends signals the market expects sharp Fed cuts. The curve normalises as the cuts actually arrive.

Common mistakes

What to avoid

!Calling recession immediately after inversion — lag is 12–18 months
!Watching only T10Y2Y — 3-month vs 10-year also matters
!Ignoring the un-inversion — the curve steepens as recession arrives
!Treating yield curve as the only macro signal

Self-check

Test yourself

Q1What does an inverted yield curve mean?+