The yield curve plots government bond yields across maturities, most commonly compared as the 10-year Treasury yield minus the 2-year yield. A normal, upward-sloping curve reflects expected growth and inflation. An inverted curve — short-term rates above long-term — signals the market expects the central bank to cut rates in the future to fight a recession. Every US recession in the past 50 years was preceded by a yield curve inversion.
The formula
10-Year Treasury Yield−2-Year Treasury Yield
= Yield Curve Spread
Why it matters
- —It's the single most reliable recession predictor in macro investing, with a historical lead time of roughly 12–18 months.
- —Inversion doesn't mean recession is imminent — it means the market expects one eventually, and the lag between inversion and the actual downturn has varied widely.
- —The curve's shape also drives sector rotation: financials benefit from a steep, normal curve and struggle when it flattens or inverts.
How to read it
| Steep and positive | Strong growth and inflation expectations — early expansion |
| Flattening | Late-cycle — growth expectations cooling |
| Inverted (negative) | Recession signal — market expects future rate cuts |