Normal Curve
A normal yield curve is upward-sloping:
- 2-year Treasury: 4.5%
- 5-year Treasury: 4.8%
- 10-year Treasury: 5.1%
- 30-year Treasury: 5.4%
Longer maturities yield more because you're locking capital longer and deserve compensation for that illiquidity.
Inverted Curve
An inverted curve slopes downward:
- 2-year Treasury: 5.1%
- 10-year Treasury: 4.4%
This reversal signals market expectation of future rate cuts, typically because a recession is anticipated.
Historical Significance
Yield curve inversions have preceded every U.S. recession since 1955. When investors believe recession is coming, they buy long-term bonds (driving yields down) to lock in returns before rates fall.
The inversion is predictive but not instantaneous — recessions typically arrive 12-18 months after inversion.
Investor Implications
An inverted curve signals time to reduce risk exposure, lock in gains, and prepare for potential economic weakness. A steep upward curve signals confidence and opportunity — investors comfortable taking risk.
