Inverted yield curve

Normally, lenders demand a higher yield to lend for longer. The yield curve inverts when that relationship flips and short-dated government bonds yield more than long-dated ones. This usually happens when a central bank has raised its policy rate to fight inflation, pushing short yields up, while investors expect those high rates to slow the economy and eventually be cut, holding long yields down. Inversion is typically measured as the gap between two points on the curve, such as ten-year minus two-year yields, or ten-year minus three-month yields.

In the United States, inversions have preceded most recessions of the past half-century, which is why they attract attention. But the signal is imperfect. The gap between an inversion and any recession has varied widely, often from several months to around two years, and inversions have occurred without a recession following as quickly as expected. The relationship is also weaker in some other countries. For investors, an inverted curve is better treated as one piece of evidence about market expectations than as a timing tool for buying or selling.