What It Measures
The yield curve shows the relationship between interest rates and time to maturity for U.S. Treasury securities. Key spreads include:
- 10Y-2Y Spread: Most commonly watched, compares intermediate vs short-term expectations
- 10Y-3M Spread: Another popular measure, preferred by some researchers
A normal curve slopes upward (long rates higher than short rates).
Why It Matters
Recession Predictor: An inverted yield curve (short rates exceeding long rates) has preceded every U.S. recession since 1970.Economic Expectations: The curve reflects market expectations for growth, inflation, and Fed policy.Bank Profitability: Banks borrow short and lend long, so a flat or inverted curve squeezes margins.Fed Policy Gauge: Shape indicates whether policy is restrictive or accommodative.
How to Interpret
Inversion: When short-term yields exceed long-term yields, typically signals recession 12-24 months ahead.Steepening: Often occurs as economy exits recession and Fed cuts short-term rates.Flattening: May signal slowing growth or Fed tightening.Watch the Re-Steepening: Recession often arrives after the curve normalizes, not during inversion.
Key Levels to Watch
| Level | Interpretation |
|---|---|
| Above +1.5% | Steeply positive, strong growth expectations |
| +0.5% to +1.5% | Normal positive slope |
| 0% to +0.5% | Flattening, caution warranted |
| Negative | Inverted, recession signal |
Historical Context
The 2022-2024 yield curve inversion was one of the longest and deepest on record, with the 10Y-2Y spread reaching -108 basis points in July 2023. The curve normalized in late 2024 without a recession having occurred (as of early 2025).