Yield Curve (Inversion)

The yield curve charts the relationship between interest rates and the maturity of government bonds.

Normally, long-term bonds offer higher yields than short-term bonds to compensate for the risks of holding them for an extended period.

When the curve inverts, short-term yields exceed long-term yields, often signalling a lack of faith in the economy’s short-term prospects.

The yield curve affects banks, as their business model relies on borrowing short and lending long.

An inversion makes this less profitable, potentially leading to reduced lending, tighter credit and, consequently, less business investment and consumer spending.

Recession signal

Inversion of the Yield CurveEvery time that 10y3m yield inverts, there has been a recession. It has a 100% accuracy. This is one of the killer tools in your recession toolbox: respect the yield curve inversion.

Track this yourself

You can find the 10y3m yield curve on TradingView: https://www.tradingview.com/chart/v7ZG3yMA/?symbol=ECONOMICS%3AUSBP

To make life easy for yourself, install US recessions indicator. Draw a red vertical line on zero. Draw a horizontal blue line the moment the Yield curve inverts – knowing when this has happened is important – and watch the yield curve fall, and then retrace to zero.