Inverted Yield Curve
Short-term bonds pay higher rates than long-term bonds. Recession predictor—has preceded every recession since 1950, usually by 12-24 months.
What You Need to Know
Inverted yield curve occurs when short-term bond yields exceed long-term yields. Most watched: 2-year Treasury yield > 10-year Treasury yield. This "inversion" signals recession expectations.
Why it happens:
- Fed raises short-term rates to fight inflation
- Bond market expects Fed to cut rates in future (economic weakness)
- Investors willing to lock in lower long-term rates expecting short rates to fall
- This expectation reflects anticipated recession
Historical accuracy:
- Every recession since 1950 preceded by inversion
- Average lead time: 12-24 months before recession
- False positive: Once in 1960s (inversion without recession)
Recent inversions:
- 2006: Inverted → 2008 financial crisis
- 2019: Brief inversion → 2020 recession (COVID)
- 2022-2023: Deep inversion (2yr at 5%, 10yr at 3.8%) → ?
Not a perfect timer: Inversion tells you recession is likely, not exactly when. Stock market often rises 6-12 months after inversion before finally declining.
What to do: Maintain emergency fund, review asset allocation, but don't panic-sell. Market timing usually fails.
Sources & References
This information is sourced from authoritative government and academic institutions:
- federalreserve.gov
https://www.federalreserve.gov/econres/notes/feds-notes/dont-fear-the-yield-curve-reprise-20200309.html
Related Calculators & Tools
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Related Terms in Economics
Federal Funds Rate
Interest rate banks charge each other for overnight loans. Set by Federal Reserve. Controls all other interest rates—mortgages, credit cards, savings.
Market Correction
10-20% market decline from recent peak. Healthy and common—happens every 1-2 years. Not as severe as 20%+ bear market.
Prime Rate
Interest rate banks charge most creditworthy customers. Usually Fed funds rate + 3%. Credit cards and HELOCs tied to prime rate.
Recession
Economic downturn with declining GDP, rising unemployment, and reduced spending. Technically 2 consecutive quarters of negative GDP growth.
Stagflation
Stagnant economy with high inflation—worst of both worlds. Rising prices + high unemployment + no growth. Rare but devastating.
Yield Curve
Graph showing bond yields across different maturities. Normal = upward slope (long-term pays more). Inverted = recession warning.