Yield Curve
The yield curve plots the yields of bonds from the same issuer, usually a government, from short to long maturities. It normally slopes upward; when short-term yields rise above long-term ones the curve is inverted, which has often come before US recessions.
Line up a government's bonds from the shortest to the longest and plot what each yields, and you get the yield curve. Its shape tells you what the market expects for interest rates, inflation and growth. A steep curve says “good times ahead”, a flat one hesitates, and an inverted one has been one of the most reliable recession warnings on record. This entry explains how to read the curve and how far to trust it.
- Category
- Bonds and Interest Rates
- Reading time
- 4 min
- Also called
- Term structure of interest rates, Steep yield curve, Flat yield curve
- Updated
The yield curve in plain words
The US Treasury publishes a daily par yield curve that links the yield on its most recently auctioned securities to their time to maturity.1
Its slope — the gap between long- and short-term rates, called the term spread — is one of the most reliable predictors of future economic activity.2
When short rates rise above long rates the curve is inverted; inversions have come before each of the last eight US recessions.3
How to read the yield curve, step by step
Plot the yields
Take government bonds from 1 month to 30 years and plot yield against maturity.
Check the slope
Upward = normal; flat = uncertain; downward = inverted.
Measure the spread
Common gauges are 10-year minus 2-year and 10-year minus 3-month. See 2s10s Spread.
Ask why it moved
Short rates follow the central bank; long rates reflect growth and inflation expectations. See Federal Reserve.
Watch for steepening or flattening
Which end is moving tells you the story. See Bond.
Treat it as a signal, not a timer
Recessions have followed inversions with long and variable lags.
Worked examples
Example 1 — A normal curve
NormalThe 3-month bill yields 3.0%, the 2-year 3.4% and the 10-year 4.2%.
| 10-year − 3-month | 4.2% − 3.0% = 1.2 points |
| Shape | Upward-sloping (normal) |
Investors usually demand more yield to lend for longer, so a positive term spread is the normal state.2
Example 2 — An inverted curve
Recession warningAfter rate hikes, the 3-month bill yields 5.3% while the 10-year yields 4.0%.
| 10-year − 3-month | 4.0% − 5.3% = −1.3 points |
| Shape | Inverted |
A rule of thumb is that inversion signals a recession in about a year; the 2019 inversion came almost a year before the 2020 recession.3
Example 3 — A false alarm
False positiveThe curve inverts in late 2022 and stays inverted into late 2024, but no recession follows in that period.
| Signal | Inverted for about two years |
| Outcome | No recession in that window |
The curve has given notable false positives, including 1966, a very flat curve in 1998 and the 2022–24 inversion.3
Yield curve shapes
| Aspect | What it looks like | Typical reading |
|---|---|---|
| Normal | Long yields above short | Growth expected |
| Steep | Big gap, long far above short | Recovery, rising inflation expectations |
| Flat | Little difference | Late cycle, uncertainty |
| Inverted | Short yields above long | Recession risk. See Recession |
How traders use the yield curve
Recession watch
Forecasters and policymakers follow the term spread closely.2
Bond positioning
Choosing short or long maturities. See Duration.
Bank stocks
Banks borrow short and lend long, so a steeper curve helps their margins.
Currency and stock signals
Curve shifts often accompany changes in the dollar and in risk appetite.
Advantages and disadvantages
Advantages
- Summarises rate, inflation and growth expectations in one picture.
- Long record as a recession indicator.
- Free daily data from the Treasury.
Disadvantages
- Lags between inversion and recession vary widely.
- False positives happen.
- Central-bank bond buying and global flows can distort long yields.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why longer usually pays more
Beginner
Lending money for ten years ties it up longer and exposes you to more inflation and rate risk than lending for three months, so long bonds normally yield more. See Interest Rate.
Which spread to watch
Intermediate
Researchers often use the 10-year Treasury minus the 3-month bill, which lines up well with growth a year later.3 Markets also quote the 2s10s Spread.
Common mistakes
Timing a crash to the day
Recessions have followed inversions months or years later — or not at all.
Watching only one spread
Compare several maturities before concluding.
Ignoring why it inverted
Rate hikes and falling growth expectations tell different stories.
Selling everything on inversion
Stocks have often risen for a while after the curve inverted.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- The yield curve plots yields against maturity.
- It normally slopes upward.
- Inversion has preceded the last eight US recessions.
- The lag is long and false alarms happen.
- Read it alongside other indicators.
Frequently asked questions
Does an inverted yield curve cause recessions?
How long after an inversion does a recession start?
Where can I see the yield curve?
Further learning
- 2s10s Spread
The most quoted slope measure.
- Recession
What the curve is trying to predict.
- Treasury Bills, Notes and Bonds
The bonds that make up the curve.
- Yield Curve Control
When central banks pin the curve.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- U.S. Department of the Treasury. Interest Rate Statistics (opens in a new tab) Checked .
- Federal Reserve Bank of San Francisco. Economic Forecasts with the Yield Curve (Economic Letter 2018-07) (opens in a new tab) Checked .
- Federal Reserve Bank of Cleveland. Yield Curve and Predicted GDP Growth (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.