Yield Curve
Yield Curve (Inversion)
The yield curve illustrates the connection between interest rates and government bond maturity periods. Typically, longer-term bonds compensate investors with elevated yields to offset extended holding risks.
When the curve inverts, short-term yields surpass long-term yields, frequently suggesting economic pessimism in the near term.
This dynamic substantially impacts banking institutions, whose profit model depends on borrowing at short rates while lending at longer rates. An inverted curve can squeeze bank margins, which can constrain credit and suppress investment and consumer expenditure.
Recession Signal
An inverted 10 year minus 3 month curve is a well known recession warning, but it is not 100% accurate. It inverted from October 2022 to December 2024, and on and off until October 2025. NBER has not dated a recession since April 2020.
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