Definition
The yield curve is a line connecting the yields of Treasuries of different maturities, from a few months to 30 years. Normally it slopes upward: lenders want a higher rate to tie up money for longer. The curve is inverted when short-term yields are higher than long-term ones. The most common way to measure it is the 10-year yield minus the 2-year yield, the spread shown on this chart: below zero means inverted.
How it works
Short-term yields track the Fed’s policy rate. Long-term yields reflect where investors expect rates to be over the coming decade. An inversion therefore means the market expects rates to be lower in the future than today – usually because it expects the Fed’s tightening to slow the economy enough to force cuts. Inversions also squeeze bank profits (banks borrow short and lend long), which can tighten credit.
Spread = 10-year Treasury yield − 2-year Treasury yield
Example
In July 2023 the 2-year Treasury yielded about 4.8% and the 10-year about 3.9%: a spread of roughly −0.9 points, the deepest inversion since the early 1980s. An investor could earn more by lending to the government for two years than for ten – a bet by the market that rates would come down. The Fed did start cutting in September 2024, the same month the curve turned positive again.
Yield curve inversion in history
Readings at turning points, taken from the same data as the chart above.
| Date | 10Y − 2Y | 2-year | 10-year | What was happening |
|---|---|---|---|---|
| Mar 1980 | −2.14% | 14.88% | 12.75% | Deepest inversion on record, just before the 1980 recession. |
| Jun 1989 | −0.13% | 8.41% | 8.28% | Mild inversion before the 1990–91 recession. |
| Apr 2000 | −0.41% | 6.40% | 5.99% | Inverted before the 2001 recession. |
| Dec 2006 | −0.11% | 4.67% | 4.56% | Inverted through much of 2006–07, before the Great Recession. |
| Feb 2010 | 2.83% | 0.86% | 3.69% | Steepest curve on record as the economy recovered with the Fed at zero. |
| Aug 2019 | 0.06% | 1.57% | 1.63% | Dipped below zero on a few days, though the monthly average stayed just above; the pandemic recession followed in 2020. |
| Jul 2023 | −0.93% | 4.83% | 3.90% | Deepest point of the 2022–24 inversion, the longest on record: monthly averages stayed negative from July 2022 to August 2024. |
| Oct 2026 | 0.39% | 4.74% | 5.13% | Latest reading. |
Monthly values; market rates are monthly averages of daily data. Explore every month on the Yield Curve (10Y − 2Y) chart.
Common mistakes
- “Inversion means recession now.” The lead time has ranged from about six months to two years, and the recession has often started after the curve turned positive again.
- “It never fails.” The long 2022–24 inversion was not followed by a recession by the time it ended, and some economists argue the signal has weakened. It is a warning, not a guarantee.
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Yield curve inversion: questions and answers
Which yield curve measure is best?
Researchers at the Federal Reserve often prefer the 10-year minus 3-month spread, which is what the New York Fed’s recession model uses. The 10-year minus 2-year spread is the one most quoted in markets. They usually tell the same story.
Does the yield curve cause recessions?
Not directly. It reflects tight monetary policy and expectations of slower growth, and those are what lead to recessions.