Every few months the financial press rediscovers the yield curve. The shape of the curve — the gap between short-term and long-term Treasury yields — is supposed to forecast recessions. Sometimes it does. Often it does so two years early, which is not the same thing as forecasting.
What the curve actually shows
Plot Treasury yields by maturity, from the 1-month bill to the 30-year bond. In a normal economy the line slopes up: lenders demand more yield to lock money up for longer. When short rates exceed long rates, the curve is “inverted.” That happens when the market expects the Fed to cut rates later — usually because growth is expected to slow.
Why the press loves it
It’s a single number you can put in a headline. The 10-year minus 2-year spread, in particular, has preceded every U.S. recession since 1969. That’s a striking record.
Why I’m careful with it
The lead time is wildly variable — anywhere from six months to over two years. The 1966 inversion produced no recession at all. And the curve has been distorted in recent years by quantitative easing and tightening cycles that didn’t exist in the historical record. A 50-year-old indicator developed in a different monetary regime is not necessarily measuring the same thing today.
A more useful question
Instead of “is the curve inverted?”, I’d ask: “what does the curve, plus credit spreads, plus unemployment claims, plus real consumer spending, all imply together?” Single indicators are headlines. Dashboards are decisions.
The yield curve is one of maybe six things I’d want on that dashboard. It’s not nothing. It’s just not everything.