Definition
The yield curve shows the relationship between yield and maturity for bonds of similar credit quality (typically Treasuries). A normal (upward-sloping) curve indicates economic growth expectations. An inverted curve (long-term yields below short-term) has historically preceded recessions. A flat curve suggests economic uncertainty.
lightbulb Example
Normal curve: 2-year at 4.0%, 5-year at 4.3%, 10-year at 4.5%, 30-year at 4.8%. Inverted: 2-year at 5.0%, 10-year at 4.2%—the 80bps inversion signals recession risk.
Pro Tip
An inverted 2s10s spread (2-year yield above 10-year) has predicted every U.S. recession in the last 50 years, though with variable lead times.
verified_user Key Points
- Normal: upward-sloping (growth expectations)
- Inverted: downward-sloping (recession signal)
- Flat: economic uncertainty
- Steepening/flattening trades capture curve movements