Yield curve
inverted yield curve · yield curve inversion · 2s10s spread
The yield curve compares long- and short-term government bond yields, usually the US 10-year minus the 2-year; when short rates rise above long rates, the curve is said to be inverted.
In plain terms
Lending money for longer carries more risk, so long-term yields are normally higher than short-term ones. When investors expect the economy to weaken and rates to fall, long-term yields can drop below short-term yields. That is an inverted yield curve.
Why it matters
In the US, an inverted curve has come before several past recessions, which is why it is watched as a warning sign. The lag between inversion and recession has varied widely, and inversions have not always been followed quickly by a downturn, so it is best read alongside jobs and spending data.
How it connects to markets
- A deepening inversion: squeezes banks' margin between borrowing short and lending long, often weighing on bank stocks; defensive sectors tend to be favored
- Un-inverting because short rates fall fast: usually means markets expect rate cuts, which can come with rising recession worries
- Un-inverting because long rates rise: read as higher growth expectations or concern about government deficits