Yield curve

The yield curve shows yields on bonds of the same issuer, usually a government, across maturities from a few months to 30 years. Its shape is read as a summary of what markets expect:

• Normal (upward-sloping): longer bonds yield more than shorter ones, compensating investors for tying money up longer. Usually associated with expectations of steady growth.
• Flat: short and long yields are similar, often during transitions in the rate cycle.
• Inverted: short-term yields are above long-term ones. Markets expect rates to fall in future, often because they expect the economy to slow.

The most quoted measure in the US is the spread between the 10-year and 2-year Treasury yields. Another is the 10-year minus the 3-month yield.

Example

Illustrative figures: the 2-year yield is 4.6% and the 10-year is 4.1%. The 10-year minus 2-year spread is minus 0.5 percentage points, or minus 50 basis points: the curve is inverted. If the 2-year later falls to 3.8% while the 10-year stays at 4.1%, the spread becomes plus 30 basis points, and the curve has "steepened" and returned to a positive slope.

Why forex traders watch it

The short end, especially the 2-year, moves closely with expected central bank policy, so it often matters most for currencies. Changes in the curve's shape can reflect shifts in expectations about rate cuts, growth or inflation. Traders compare curves between countries to understand interest rate differentials.

Common misconception

An inverted US curve has preceded several past recessions, which has given it a reputation as a recession signal. It is not a timer: the lag has varied widely, and it has produced long periods of inversion without an immediate recession. Treat it as one input, not a forecast.

See central banks and interest rates.