Yield curve

The yield curve plots the interest rates of government bonds across maturities — typically from the 3-month rate out to the 30-year rate. The shape of the curve is a single picture of how the bond market is pricing the future path of short-term interest rates, term premia, and expected inflation.

An "upward-sloping" or "normal" curve — long-dated yields above short-dated — is the common regime and reflects investors demanding more yield to lock up capital for longer. A "flat" curve has similar rates across maturities. An "inverted" curve — short-dated yields above long-dated — is unusual; historically, a sustained 2-year vs. 10-year inversion has preceded every US recession over the past half-century, though with highly variable lead time.

The mechanism behind the signal is straightforward: the curve inverts when investors expect short rates to fall, which usually happens because they expect the central bank to cut in response to slowing growth. The curve isn't causing a recession; it's aggregating expectations that a recession is coming.