Yield Curve

The yield curve is a visual representation of interest rates across different bond maturities, typically using U.S. Treasury securities ranging from one month to 30 years. A normal yield curve slopes upward, with longer-term bonds offering higher yields to compensate for the added risk of holding them for longer periods.

An inverted yield curve occurs when short-term interest rates exceed long-term rates, and it has historically been one of the most reliable predictors of recession. Every U.S. recession since 1955 has been preceded by a yield curve inversion, though the timing between inversion and recession onset varies from six months to two years. The inversion suggests that investors expect interest rates to fall in the future due to economic weakness.

A flat yield curve, where short-term and long-term rates are nearly equal, often represents a transitional period between normal and inverted conditions. The yield curve influences lending decisions, mortgage rates, and investment strategies. Banks profit from the spread between short-term borrowing costs and long-term lending rates, so a flat or inverted curve can squeeze bank profitability and tighten credit conditions.