Definition
An inverted yield curve occurs when short-term rates (2-year Treasury) exceed long-term rates (10-year Treasury). This reflects market expectations that the Fed will need to cut rates in the future due to an economic slowdown. An inverted 2s10s spread has preceded every U.S. recession in the last 50 years, typically with a 6-18 month lead time, though the timing is variable.
lightbulb Example
In 2022, the 2-year Treasury yield reached 4.7% while the 10-year was 3.5%—a -120bps inversion. This deep inversion signaled market expectation of Fed rate cuts due to anticipated economic weakness.
verified_user Key Points
- Short-term yields exceed long-term yields
- Has predicted every U.S. recession in 50 years
- Typically leads recession by 6-18 months
- Reflects market expectations of future rate cuts