Yield Curve

The yield curve is a graph that plots the interest rates of bonds with the same credit quality but different maturities — 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 — signals healthy growth expectations. The typical 2Y-10Y spread is 100-200 basis points

- Flat: Short and long-term yields converge — signals uncertainty about economic outlook

- Inverted: Short-term yields exceed long-term yields — 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.

Source: Federal Reserve Bank of St. Louis (FRED), U.S. Treasury Department

📊 ECONPLEX

Yield Curve

Bonds & Rates

Yield Curve Inversion

Spread

Duration

Treasury Bond

Fed Balance Sheet

Bond Auction