Glossary
Inverted yield curve
A yield curve on which short-term yields exceed long-term yields, which has preceded most US recessions since the 1960s.
An inverted yield curve is a moment when short-term government bonds yield more than long-term ones, the reverse of the normal pattern in which lenders demand more to tie money up for longer. It is watched closely because in the US an inversion has come before almost every recession since the late 1960s, which makes it one of the best-known recession warning signs.
How it is measured
Analysts track the gap, or spread, between two Treasury yields. The two most quoted are the 10-year minus the 3-month yield (used in the New York Fed's recession-probability model) and the 10-year minus the 2-year yield.
Why it happens and what it means
Short-term yields follow the central bank's policy rate. Long-term yields reflect expectations of where short rates will average in the future. An inversion usually means the Fed has raised rates to fight inflation while investors expect it will later have to cut them, often because growth will slow.
The signal is imperfect. Its lead time has ranged from several months to about two years, it gave a false alarm in the mid-1960s, and the long 2022–2024 inversion was followed by continued expansion rather than a quick recession. Recessions have often started after the curve un-inverted, as the Fed began cutting. Treat it as raising the odds, not setting a date.