Economy and interest rates · updated October 21, 2026
What is the yield curve and what does it mean when it inverts
The yield curve plots the yields on government bonds for 3 months, 2 years, 10 years and 30 years. Normally it slopes upward: money lent for longer demands a higher rate. When short-term yields rise above long-term ones, the curve is inverted, and that has often been a recession signal.
How it works
Investors mostly watch the gap between the 10-year yield and the 2-year yield. Positive means a normal curve. Negative means the market expects the central bank to cut rates in the future, usually because the economy will slow. In the US, an inverted curve has come before almost every recession of the last 50 years, usually by 6-24 months.
Worked example
2-year government bonds yield 5%, and 10-year bonds yield 4%.
The market pays less for money locked up for 10 years than for 2 years: it expects rates to fall.
How to read the yield curve
The signal is not perfect. In the US, the curve was inverted from 2022 to 2024, the longest inversion in decades, but it was not followed by a recession in the years right after.
When the yield curve can fool you
It does not say when: between the inversion and the recession, anywhere from a few months to two years have passed, and stocks sometimes rose a lot in the meantime. The return to normal can come right before the recession, not after it.
Related terms
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Questions about the yield curve
Why does an inverted curve signal a recession?
Because it shows the market expects lower rates in the future, and central banks mostly cut rates when the economy weakens. Banks also earn less, so they lend less.
Which gap do people watch?
Most often, the 10-year yield minus the 2-year yield. Some economists prefer 10 years minus 3 months.
These explanations are for information only. They are not a recommendation to buy or sell.
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