Definition
The Treasury yield curve is the most-watched version, showing US Treasury yields from 1-month bills through 30-year bonds. A 'normal' upward-sloping curve reflects investors demanding higher yields for locking in money longer. A 'flat' curve suggests uncertainty about the growth path. An 'inverted' curve — where short-term yields exceed long-term yields — has historically preceded most US recessions, though with a variable 6–24 month lead. The 2s10s spread (10-year minus 2-year yield) and the 3m10y spread are the most common inversion signals. The curve's shape drives everything from mortgage rates to corporate borrowing costs to bank profitability.
Example
In mid-2023, the 2-year Treasury yielded ~5.0% while the 10-year yielded ~3.9% — a −110 bps inversion. This preceded a widely-expected but delayed recessionary period as the Fed maintained restrictive policy.
Frequently Asked Questions
Why does the yield curve invert?
Usually because the central bank hiked short rates aggressively to fight inflation, while long-rate expectations reflect slower future growth or eventual rate cuts.
Does an inverted yield curve guarantee a recession?
No — but historically, since 1955, every US recession has been preceded by a yield curve inversion. False signals are rare but do exist.
What's the difference between the 2s10s and 3m10y spread?
2s10s = 10-year minus 2-year Treasury yield. 3m10y = 10-year minus 3-month T-bill yield. The Fed itself views 3m10y as the more reliable recession predictor.