Yield Curve Inversion
Definition
A Yield Curve Inversion occurs when short‑term interest rates rise above long‑term interest rates — the opposite of a normal yield curve.
Why It Matters
- Historically one of the strongest predictors of recessions.
- Signals expectations of future rate cuts or economic slowdown.
- Reflects investor demand for long‑term safety.
Interpretation
- Normal curve: Long‑term yields > short‑term yields.
- Inverted curve: Short‑term yields > long‑term yields → recession risk.
- Flat curve: Transition phase, uncertainty.
Example
If the 2‑year Treasury yield is 5.0% and the 10‑year yield is 4.2%, the curve is inverted by 80 basis points.