Overview
The yield curve is a graph that plots the interest rates of bonds with the same credit quality but different maturities โ typically U.S. Treasury securities from 1-month to 30-year. The shape of the curve reflects market expectations about future interest rates, economic growth, and inflation.
Three Key Shapes
- Normal (upward-sloping): Longer maturities pay higher yields to compensate for added risk โ signals healthy growth expectations. The typical 2Y-10Y spread is 100-200 basis points
- Flat: Short and long-term yields converge โ signals uncertainty about economic outlook
- Inverted: Short-term yields exceed long-term yields โ historically the most reliable recession predictor
Why It Matters
The yield curve captures the collective wisdom of the entire bond market ($27+ trillion in outstanding Treasury securities). It affects mortgage rates, corporate borrowing costs, and bank profitability (banks borrow short and lend long, so a steep curve is profitable; an inverted curve squeezes margins).
Key Spreads to Watch
- 2Y-10Y spread: Most widely followed by media and traders
- 3M-10Y spread: Strongest historical predictive power for recessions (NY Fed recession probability model uses this)
- 2Y-30Y spread: Reflects long-term growth and inflation expectations
Historical Context
The 2Y-10Y curve inverted in March 2022 and remained inverted for a record-breaking 793 days (surpassing the previous record from the 1970s). The curve steepened sharply in late 2024 as markets priced in rate cuts.