Yield Curve

The yield curve plots government bond yields on the y-axis and bond maturities on the x-axis (3-month, 2-year, 10-year, 30-year). A normal yield curve slopes upward — longer-dated bonds pay more interest than shorter-dated bonds, because investors demand compensation for tying up money longer. The shape of the curve is one of the most powerful macro indicators. A steep curve = strong economy expected. A flat curve = uncertainty. An INVERTED curve (short-term yields higher than long-term yields) is the most reliable recession predictor in economic history — it has preceded every US recession in the past 60 years with only one false positive. The specific spread to watch is the 10-year minus the 2-year. When this goes negative (10y < 2y), the curve is inverted and a recession typically follows within 12-24 months.