Inverted Yield Curve
A yield curve where short-term interest rates exceed long-term rates, historically a reliable recession predictor.
What is Inverted Yield Curve?
An inverted yield curve occurs when short-term government bond yields rise above long-term yields — the opposite of the normal upward-sloping yield curve. The most closely watched inversion is the 2-year Treasury yield exceeding the 10-year Treasury yield (the "2s10s" spread). Inversions occur when investors expect future interest rates to fall — typically because they anticipate economic weakness or central bank rate cuts. The 2s10s spread has preceded every US recession since 1955, usually with a lag of 6–24 months, making it one of the most reliable leading economic indicators. The mechanism: when banks borrow short (deposits) and lend long (loans), an inverted curve compresses their margins, discouraging lending and slowing credit growth.
Example
The 2-year Treasury yield exceeded the 10-year yield in July 2022 and remained inverted through most of 2023 — the deepest and longest inversion since the early 1980s. The inversion reached -100 basis points at its extreme. While GDP remained positive through this period, bank credit growth slowed sharply and the commercial real estate market began deteriorating, consistent with historical post-inversion patterns of tightening financial conditions.
Source: Federal Reserve Bank of St. Louis — FRED Treasury Spreads