The Yield Curve
Normal, inverted, and flat curves — what each signals about the economy and historical recession prediction
In August 2019, the yield on the 2-year Treasury briefly exceeded the yield on the 10-year Treasury. Financial headlines screamed 'RECESSION SIGNAL.' Six months later, the U.
S. entered its sharpest economic contraction since the Great Depression. The yield curve had inverted before every U.
S. recession since 1955, with zero false negatives over seven decades. No other economic indicator has that track record.
Understanding what the yield curve is, why it inverts, and what it means requires understanding the term structure of interest rates — the single most information-dense chart in all of finance. The yield curve plots yield-to-maturity (vertical axis) against time-to-maturity (horizontal axis) for bonds of the same credit quality — typically U.S.
Treasuries. On any given day, the Treasury issues debt maturing in 1 month, 3 months, 6 months, 1 year, 2 years, 3 years, 5 years, 7 years, 10 years, 20 years, and 30 years.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 7 sections and ends with 5 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1What the yield curve actually shows
- 2The three yield curve shapes
- 3Yield curve inversions vs. U.S. recessions (1978-2022)
- 4Why the inversion-to-recession lag is variable (6-22 months)
- 5The flat curve: the transition state
- 6Yield Curve Explorer
- 7Where to see this on the platform