Inverted Yield Curve
When short-term Treasury yields exceed long-term yields — historically the most reliable leading indicator of U.S. recession.
An inverted yield curve occurs when yields on short-dated Treasuries (e.g., 2-year) rise above long-dated ones (e.g., 10-year). This is the opposite of the normal upward-sloping structure.
Inversion signals that markets expect future interest rates to fall — typically because economic slowdown or recession is anticipated. The Fed has raised short-term rates aggressively, but long-term yields remain anchored by low inflation expectations ahead. Every U.S. recession since the 1970s has been preceded by inversion.
Critically, it is the un-inversion (curve re-steepening from an inverted state) that has historically been closest in time to the recession's actual start. Traders watch for this inflection point — a curve re-steepening after deep inversion is a warning, not an all-clear.
Example
In 2022–2023 the 2-year Treasury yielded over 5% while the 10-year stayed near 4% — a deeply inverted 2s10s spread of more than -100 basis points, the deepest inversion since the 1980s. Recession signals were widely cited.
Related Terms
2s10s Spread
The yield difference between the 10-year and 2-year U.S. Treasury notes — the most widely cited gauge of yield curve shape and recession risk.
IntermediateCarry (Rates)
In fixed income, the net income earned by holding a bond position after financing costs — positive carry means the bond yields more than its funding rate.
AdvancedCurve Flattening
When the yield spread between long- and short-term Treasuries narrows — short yields rising faster than long yields, or long yields falling faster.
AdvancedCurve Steepening
When the yield spread between long- and short-term Treasuries widens — usually as long yields rise faster than short yields, or short yields fall faster.
AdvancedFederal Funds Rate
The overnight interest rate at which U.S. banks lend reserve balances to each other — the primary policy rate the Fed targets to steer the economy.
IntermediateYield Curve
A graph of Treasury yields across all maturities — from 3 months to 30 years — that maps the term structure of interest rates at a given moment.
Intermediate