Inverted Yield Curve
An inverted yield curve occurs when short-term bond yields are higher than long-term yields, a pattern that has often preceded US recessions.
Normally investors receive higher yields for lending money longer. When the curve inverts, short-term Treasuries pay more than long-term ones. This typically happens when the Federal Reserve has raised short-term rates to fight inflation while investors expect slower growth and lower rates in the future.
Inversion is closely watched because an inverted 10-year versus 3-month or 10-year versus 2-year Treasury spread has preceded most US recessions since the 1960s. It also affects banks, which tend to borrow short and lend long, so an inversion can squeeze their profits and lending.
As a forecasting signal, it is imperfect. The lag between inversion and recession has ranged from several months to around two years, and some inversions have not been followed by a recession at all. Stock markets have sometimes risen for a long time after an inversion.
Example: if the 2-year Treasury yields 4.8% and the 10-year yields 4.2%, the 10-year minus 2-year spread is -0.6 percentage points, and the curve is inverted.