Dictionary

Inverted yield curve

When short-term Treasury yields exceed long-term yields; historically a recession warning with a long and variable lead.

Three shapes of the yield curve. The yield curve plots the interest a bond pays against how long you have to wait to get your money back. Normally longer bonds pay more; sometimes every maturity pays the same, and sometimes short bonds pay the most.

Inversion means the market expects rates to fall in the future, usually because it expects the economy to weaken. Every US recession since the 1970s was preceded by a 2s10s inversion, but the lag has ranged from six months to two years, and the curve typically un-inverts before the recession starts.

It is a macro backdrop, not a trading signal with a timestamp.

Example: the 2s10s spread inverted in July 2022 and stayed inverted for over two years, the longest on record, while stocks made new highs.

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