TL;DR: The yield curve plots Treasury yields against time to maturity. Normally it slopes up — investors demand more yield to lock money up for longer. When short-term yields rise above long-term yields, the curve inverts, and historically that has preceded every US recession since 1970. As of June 1, 2026, the US curve is positively sloped again after the longest inversion on record.
What the yield curve actually is
The “yield curve” is just a line connecting the yields of US Treasury securities at different maturities, from a few weeks out to thirty years. The Treasury sells bills (less than 1 year), notes (2 to 10 years), and bonds (20 and 30 years), and the daily yields are published by the Federal Reserve in the H.15 release and by the US Treasury.
Because these are obligations of the same issuer (the US government), the only difference between them is how long the cash is locked up. That makes the curve a clean read on what bond investors think about time, inflation, and Federal Reserve policy.
Three shapes, three messages
The curve takes three canonical shapes:
- Normal (upward-sloping): long yields above short yields. The market expects steady growth and roughly stable policy rates. Investors collect a “term premium” for tying up money longer.
- Flat: short and long yields are similar. Often a transition state — the market is uncertain about the next policy move.
- Inverted: short yields above long yields. The market expects the Federal Reserve to cut rates in the future, usually because growth is slowing. This is the shape that has gotten famous as a recession warning.
The curve right now
| Maturity | Yield (%) | Spread vs 2Y (bp) |
|---|---|---|
| 1 month | 3.72 | −33 |
| 3 months | 3.78 | −27 |
| 6 months | 3.79 | −26 |
| 1 year | 3.83 | −22 |
| 2 years | 4.05 | 0 |
| 3 years | 4.09 | +4 |
| 5 years | 4.18 | +13 |
| 7 years | 4.32 | +27 |
| 10 years | 4.47 | +42 |
| 20 years | 4.99 | +94 |
| 30 years | 4.99 | +94 |
The curve on June 1, 2026 slopes upward across the whole maturity spectrum. The 10-year yields 42 basis points more than the 2-year, and the 30-year yields a full 94 basis points more. That is the textbook “normal” shape, and it ended what was, by some measures, the longest 10Y-2Y inversion in modern US history.
How yields and prices actually relate
Treasury yields move opposite to Treasury prices. When investors buy a lot of long-dated bonds, prices rise and yields fall. When investors sell long-dated bonds (or refuse to buy at current yields), prices fall and yields rise.
Short-term yields are anchored by the Federal Reserve’s policy rate — when the Fed raises the federal funds target, T-bill yields and 2-year yields move with it. Long-term yields are set more by market expectations: what investors think inflation, growth, and policy rates will average over the next 10 to 30 years, plus a term premium for the uncertainty around that estimate.
That is why an inversion is so informative. If 2-year yields rise above 10-year yields, the bond market is effectively saying: policy rates are too high today, and we expect them to be lower in a few years. The most common reason rates fall is because the economy is weak enough to force the Fed to cut.
The recession track record
Research by the New York Fed (Estrella and Mishkin’s foundational work, summarized in the bank’s yield curve FAQ) shows that an inverted curve has preceded every US recession since the late 1960s, usually by 6 to 18 months. The National Bureau of Economic Research dates US recessions, and the pattern lines up:
- 10Y-2Y inverted in 1978-1980 → recession Jan 1980 and again Jul 1981.
- Inverted briefly in 1989 → recession Jul 1990.
- Inverted in 2000 → recession Mar 2001.
- Inverted in 2006-2007 → recession Dec 2007 (the Global Financial Crisis).
- Inverted briefly in Aug 2019 → recession Feb 2020 (the COVID shock).
The New York Fed publishes a recession probability model based on the 10-year minus 3-month spread — their preferred measure because the 3-month T-bill tracks Fed policy more directly than the 2-year note. The 10Y-2Y is more famous in the press, but the 10Y-3M has a slightly cleaner statistical record.
What 2022 to 2024 changed
The 10Y-2Y spread first inverted in July 2022, stayed inverted for roughly two years — the longest stretch since FRED data begins in 1976 — and finally turned positive again in late summer 2024. No US recession has been formally dated during or since that inversion as of mid-2026.
That has produced an honest debate among economists. Three explanations are doing most of the work:
- The lag is longer than usual. Inversions usually precede recessions by 6 to 18 months, but the 2006 inversion took roughly 18 months to translate into recession. The 2022 inversion may simply have a longer tail than recent cycles.
- The Fed’s balance sheet distorted the signal. Large-scale asset purchases compressed long-end yields well below where they would have been without quantitative easing, making the curve look more inverted than the underlying economy implied.
- The economy genuinely changed. Strong household balance sheets, locked-in low mortgage rates, and AI-driven capital spending offset the drag from higher policy rates.
None of these explanations invalidates the indicator. They explain why a 50-year-old statistical relationship might be noisier in one specific cycle. The base-rate finding — every recession since 1970 was preceded by an inversion — still holds.
How to use the curve (and how not to)
The yield curve is a conditioning variable, not a timing signal. It tells you the probability distribution of future outcomes has shifted, but it does not say “sell stocks on Tuesday.”
Practical uses:
- Risk budget: when the curve is deeply inverted, raise your bar for taking new long-duration credit risk, because recessions widen credit spreads.
- Refinancing decisions: a steep curve with a high long end may favor locking in shorter-term debt. A flat or inverted curve favors locking in longer.
- Fed policy reading: the gap between the current fed funds rate and the 2-year yield is the market’s view of where policy is heading over the next year or two.
Practical misuses:
- Using one threshold as an alarm. A spread of −5 bp and +5 bp are economically indistinguishable, but they generate opposite headlines.
- Ignoring the un-inversion. The curve typically steepens back to positive right before the recession arrives, as the Fed starts cutting short rates. Treating the un-inversion as an all-clear is exactly backwards.
- Equating “inversion” with “imminent crash.” Stocks have often kept rising for many months after the curve inverts. The signal is about the next year or two, not the next week.
Related concepts to learn next
The yield curve sits at the center of several other topics worth learning:
- Bond convexity — the second-order math of why long-duration bonds amplify yield moves.
- Credit default swaps — how the market prices the risk that bonds default, separate from rate risk.
- The repo market — the short-term funding plumbing that anchors the front end of the curve.
- CPI vs PCE — the inflation series that shape Fed expectations and therefore the curve.
Sources
- Federal Reserve, H.15 daily release — federalreserve.gov/releases/h15/
- US Treasury daily par yield curve methodology — treasury.gov
- FRED 10-Year Treasury Constant Maturity Minus 2-Year (T10Y2Y) — fred.stlouisfed.org/series/T10Y2Y
- FRED 10-Year Treasury Constant Maturity Minus 3-Month (T10Y3M) — fred.stlouisfed.org/series/T10Y3M
- Federal Reserve Bank of New York — The Yield Curve as a Leading Indicator — newyorkfed.org/research/capital_markets/ycfaq
- NBER US business cycle dates — nber.org
Disclosure: This article was produced with AI assistance and reviewed before publication. It is for informational purposes only and is not investment advice.