Yield Curve

What Is the Yield Curve?

The yield curve plots the yields of US Treasury bonds across different maturities, from one month to thirty years. In a normal economic environment, longer-dated bonds yield more than shorter-dated ones because investors demand compensation for tying up money for longer — this is a "normal" upward-sloping curve.

Key Segments

• 2s10s spread: The difference between the 10-year yield and the 2-year yield. The most-watched spread in financial markets.
• 2s30s spread: Captures even more term premium
• 3m10s spread: Preferred by some economists as a recession predictor

Curve Shapes and What They Signal

Normal (positive slope): Long rates > short rates. Indicates growth expectations and modest inflation.

Flat: Long and short rates are similar. Often occurs during monetary tightening as short rates catch up to long rates.

Inverted (negative slope): Short rates > long rates. Historically the most reliable recession predictor — every US recession since 1970 was preceded by curve inversion. The 2022–2024 inversion was the deepest and longest since the 1980s.

Steepening bear: Both ends rise, but long end rises faster — typically reflects inflation premium or fiscal concerns. Bearish for bonds.

Bull steepening: Short end falls (rate cut expectations) while long end is stable. Often signals imminent monetary easing.

Why Inversion Causes Recessions

Inversion crushes bank margins (banks borrow short, lend long), tightening credit availability. It also signals that the market expects the Fed to cut rates sharply in the future — which implies an economic downturn is expected.

The Disinversion

After a long inversion, the curve typically re-steepens just before a recession begins. This bull-steepening can be mistaken for an all-clear; historically it is a warning sign that cuts are coming and recession is near.