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What is the yield curve?

In one line: The yield curve is a line showing the interest rates (yields) on government bonds from short terms, like 3 months, to long terms, like 30 years.

Trading glossary · Updated 2026-10-21

A simple example with numbers

Line up US Treasury yields from shortest to longest. These are made-up numbers for illustration:

Normal: longer loans pay more. That makes sense: you tie up your money longer, so you want more for it.

Inverted: short loans pay more than long ones. The curve slopes down.

The number people quote

Many watch the 10-year yield minus the 2-year yield. In the inverted example above: 4.0% − 4.6% = −0.6%. A negative number means the curve is inverted.

Why it matters

Short-term yields follow the Central bank's policy rate closely. Long-term yields reflect what investors expect for growth and Inflation over many years.

When the curve inverts, it often means investors expect rates to come down later, frequently because they expect the economy to slow. In the US, inversions have come before many past Recessions.

The US 2-year/10-year curve inverted in July 2022 and stayed that way until around late summer 2024, one of the longest inversions on record. A recession did not follow in that window. That's a good reminder: it's a warning light, not a calendar.

For the bigger picture, see how interest rates affect stocks and the Bond yield page.

A common mistake

Treating an inversion as a timer. Past gaps between an inversion and a recession have ranged from months to a couple of years, and some inversions had no recession at all. Don't change your trade plan on the curve alone. Your chart and your stop come first.

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