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Intermediate · Lesson 4 of 5The yield curve
The yield curve plots government bond yields against maturity. Normally it slopes upward: lenders want more to lock money away longer. When short-term yields rise above long-term yields, the curve is inverted.
In the US, an inverted curve (10-year minus 3-month or 2-year) has preceded most recessions since the 1960s, though with variable and long lags, and the long 2022-24 inversion was followed by continued growth for a time, showing it is a warning, not a timer.
The curve reflects expected central bank policy, inflation expectations and a term premium. Vestora's Big picture screen shows current US yields.
Key takeaways
- Normal curve slopes upward.
- Inversion has often preceded US recessions, with long lags.
- The curve blends rate expectations and term premium.
Check your understanding
1. An inverted yield curve means...
- Long yields above short yields
- Short yields above long yields
- All yields are zero
- Shares are cheap
Show the answer
Short yields above long yields. Short-term rates exceed long-term rates.
2. How reliable is inversion as a recession timer?
- Exact to the month
- A warning with long, variable lags
- Useless
- Only for Australia
Show the answer
A warning with long, variable lags. Lags have ranged widely.
Go deeper
- Wikipedia: Yield curve
- YouTube videos: yield curve inversion recession explained
- Investopedia: yield curve
- Wikipedia: Term premium
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