Inverting yield curves

What Is a Yield Curve?

A yield curve is a line that plots yields (interest rates) of bonds of the same credit quality but differing maturities.

The most closely watched yield curve is that for U.S. Treasury debt.

Usually, the yield curve slopes upward, reflecting the fact that holders of longer-term debt have taken on more risk.

Analysts often distill yield curve signals to a spread between two maturities. This simplifies the task of interpreting a yield curve in which an inversion exists between some maturities but not others. The downside is that there is no general agreement as to which spread serves as the most reliable recession indicator.

What Is an Inverted Yield Curve?

An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on the short-term debt of the same credit quality.

Academic studies of the relationship between an inverted yield curve and recessions have tended to look at the spread between the yields on the 10-year U.S. Treasury bond and the three-month Treasury bill, while market participants have more often focused on the yield spread between the 10-year and two-year bonds.