Bonds & rates
Inverted yield curve
When short-term bonds yield more than long-term ones — historically a recession warning.
How it works
Inversion implies markets expect rates to be cut, which normally means they expect the economy to weaken. It has preceded most recent recessions in major economies.
The lead time is long and highly variable, from several months to over two years, and there have been signals that did not result in recession.
Where it misleads people
The signal is about a recession, not about equity returns. Markets have frequently continued rising for a considerable period after an inversion appeared.
Related terms
- Yield curveA chart of government bond yields across maturities, from months to decades.
- RecessionA significant, broad-based decline in economic activity lasting more than a few months.
- Central bankThe institution that sets a country’s benchmark interest rate and manages its money supply.
- Term premiumThe extra yield investors demand for lending long rather than rolling short-term loans.
Mentioned in
More in Bonds & rates
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.