what is an inverted yield curve 
an inverted yield curve shows that long term u s treasury debt interest rates are less than short term interest rates when the yield curve is inverted yields decrease the farther out the maturity date is sometimes referred to as a negative yield curve the inverted curve has proven to be a reliable indicator of a recession as background the yield curve is a graphic depiction of the borrowing cost associated with debt securities of different maturities normally the yields for shorter term securities are lower than those for longer term securities laura porter investopediaunderstanding inverted yield curvesas noted the yield curve graphically represents yields on similar bonds across a variety of maturities it is also known as the term structure of interest rates for example the u s treasury publishes daily treasury bill and bond yields that can be charted as a curve 1analysts often distill yield curve signals to a spread between two maturities this simplifies the task of interpreting a yield curve in which an inversion exists between some maturities but not others the downside is that there is no general agreement as to which spread serves as the most reliable recession indicator 2usually the yield curve slopes upward reflecting the fact that holders of longer term debt have taken on more risk image by julie bang investopedia 2019a yield curve inverts when long term interest rates drop below short term rates indicating that investors are moving money away from short term bonds and into long term ones this suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future such an inversion has served as a relatively reliable recession indicator in the modern era 34 because yield curve inversions are relatively rare yet have often preceded recessions they typically draw heavy scrutiny from financial market participants an inverted treasury yield curve has proven in the past to be one of the most reliable leading indicators of a recession indicative spreadsacademic studies of the relationship between an inverted yield curve and recessions have tended to look at the spread between the yields on the 10 year u s treasury bond and the three month treasury bill on the other hand market participants have more often focused on the yield spread between the 10 year and two year bonds 3federal reserve chair jerome powell said in march 2022 that he prefers to gauge recession risk by focusing on the difference between the current three month treasury bill rate and the market pricing of derivatives predicting the same rate 18 months later 56historical examples of inverted yield curvesthe 10 year to two year treasury spread has been a generally reliable recession indicator since providing a false positive in the mid 1960s 7 that hasn t stopped a long list of senior u s economic officials from discounting its predictive powers over the years 8in 1998 the 10 year two year spread briefly inverted after the russian debt default quick interest rate cuts by the federal reserve helped avert a u s recession in 2006 the spread inverted for much of the year long term treasury bonds went on to outperform stocks during 2007 the great recession began in december 2007 on aug 28 2019 the 10 year two year spread briefly went negative the u s economy suffered a two month recession in february and march of 2020 amid the outbreak of the covid 19 pandemic which could not have been a consideration embedded in bond prices six months earlier while an inverted yield curve has often preceded recessions in recent decades it does not cause them rather bond prices reflect investors expectations that longer term yields will decline as typically happens in a recession at the end of 2022 against a backdrop of surging inflation the yield curve got inverted again as of dec 4 2023 treasury yields were as follows as you can see above the 10 year u s treasury rate was 0 34 percentage points below the two year yield while the inverted yield curve has narrowed since 2022 it was still inverted as of late 2023 https www ustreasuryyieldcurve com 