A chart showing interest rates for bonds of different maturities.
The yield curve is a graph showing interest rates (yields) for bonds of the same credit quality but different maturities (1 year, 5 years, 10 years, 30 years). Normally, the yield curve slopes upward: longer-term bonds offer higher yields because investors demand compensation for locking up money longer. This is the "normal" yield curve. When the curve inverts (short-term rates exceed long-term rates), it signals recession concerns and has historically preceded recessions. A flat yield curve shows little difference between short and long rates, often indicating economic transition. The Fed controls short-term rates through monetary policy; market forces determine long-term rates based on inflation expectations. Monitoring the yield curve helps predict economic cycles; bond investors use it to decide between short and long-term bonds.
The U.S. Treasury yield curve is constructed daily from secondary-market trading data on Treasury securities and published as the "Daily Treasury Par Yield Curve Rates." The Treasury fits a quasi-cubic Hermite spline through observed Treasury bill, note, and bond yields at constant maturities (1m, 2m, 3m, 4m, 6m, 1y, 2y, 3y, 5y, 7y, 10y, 20y, 30y) to produce a continuous yield curve. The most-watched "shape" indicators are the 10y-2y spread (FRED series T10Y2Y) and the 10y-3m spread (T10Y3M). When either of these spreads goes NEGATIVE — i.e., short rates exceed long rates — the curve is INVERTED. The Federal Reserve Bank of New York publishes a monthly recession-probability model that uses the 10y-3m spread as its primary input; this model has historically predicted recessions with about a 12-18 month lead. Common mistakes: (1) confusing the yield curve with a single rate — it's a SHAPE across maturities, not a level, (2) assuming every inversion causes a recession instantly — the historical pattern is recession FOLLOWING inversion by 6-24 months, with one false positive (1966) and several long lags, (3) using nominal yields without inflation context — real yields (TIPS) tell a different story, (4) treating "the yield curve" as a single curve when there are actually several: Treasury, agency, corporate, municipal — each carries its own credit-risk shape, (5) trading individual bonds based on curve calls without understanding duration risk. The yield curve is descriptive, not prescriptive — it summarizes market expectations about future short rates plus a term premium, both of which can be wrong.
An inverted yield curve is when short-term Treasury yields exceed long-term Treasury yields — for example, when the 2-year yield is higher than the 10-year yield. The two most-cited spreads are 10y-2y and 10y-3m (FRED series T10Y2Y and T10Y3M). Inversion is unusual because, normally, investors demand higher yields to lock up money for longer (the "term premium"). When the curve inverts, the market is essentially betting that the Federal Reserve will cut rates in the future, typically because of weakening growth or recession risk.
The 10-year minus 3-month Treasury spread has preceded every U.S. recession since the late 1960s, with one widely-cited false positive in 1966. The Federal Reserve Bank of New York publishes a recession-probability model based on this spread. However, the LAG is variable — historically 6 to 24 months between inversion and recession onset — and the model is descriptive, not prescriptive. Yield-curve inversion is one of the strongest leading indicators in macroeconomics, but it doesn't set a specific recession start date.
The U.S. Department of the Treasury publishes the Daily Treasury Par Yield Curve Rates each business day, covering maturities from 1 month to 30 years. The Federal Reserve Bank of St. Louis FRED database publishes the curve plus key spreads (T10Y2Y, T10Y3M) updated daily. The New York Fed also publishes a yield-curve-based recession-probability index updated monthly. All three sources are free and public.
Normal: longer maturities have higher yields, sloping upward — the typical shape during economic expansion. Flat: yields across maturities are very close — often a transitional shape, either before inversion or during emergence from inversion. Inverted: short-term yields exceed long-term yields, sloping downward — historically associated with elevated recession risk over the following 6-24 months. The shape can change rapidly as markets reprice Fed policy expectations.
The Federal Reserve directly controls only the federal funds rate (an overnight rate) through the Federal Open Market Committee (FOMC). This sets the floor for short-term Treasury yields. Long-term yields are determined by the bond market based on expected future short rates plus a term premium (compensation for duration risk and uncertainty about inflation). The Fed can influence long-term yields indirectly through quantitative easing (buying long-term bonds) or quantitative tightening (selling them), and through forward guidance about future rate paths. The result is that the SHAPE of the curve reflects the market's view of future Fed policy, not just the current policy stance.
This is a tactical bond-portfolio question that CalcFi does not give personal advice on. The general principle, well-documented in CFA Institute fixed-income materials: when the curve is inverted, locking in current LONG rates means accepting a lower yield today in exchange for protection against future rate CUTS. If the recession scenario plays out and the Fed cuts, long bonds appreciate (rates fall, prices rise) — but the income stream is lower than what cash earns at the moment. The trade-off is duration risk for reinvestment risk. Consult a licensed financial professional for personalized fixed-income allocation decisions.
This definition is cross-checked against the following primary sources. All sources are free, public, and authoritative.