US Yield Curve

Interpretation

The charts above display the spreads between long-term and short-term US Government Bond Yields. The flags mark the beginning of a recession according to Wikipedia.

A negative spread indicates an inverted yield curve. In such a scenario short-term interest rates are higher than long-term rates, which is often considered a predictor of an economic recession. Typically the spread between long-term and short-term bond yields is positive, with investors demanding more compensation to hold a bond for a longer period given the increased risk of inflation and other uncertainties.

According to Jeffrey Sneider, an inverted yield curve signals that investors expect slower economic growth and future rate cuts from the Federal Reserve. This inversion happens as investors seek safety in long-term bonds, driving their yields lower, while short-term rates remain high, typically due to the Federal Reserve's monetary policy aimed at controlling inflation or cooling down an overheating economy.

As the economy approaches a recession, the yield curve often un-inverts in one of two ways. It can happen when short-term rates fall faster than long-term rates, driven by the expectation of multiple rate cuts from the Federal Reserve. Alternatively, un-inversion can occur when long-term rates rise faster than short-term rates, reflecting market confidence in a potential soft landing or economic recovery.

Further Information

• TradingView Chart: The Yield Curve
• Investopedia: What Is a Government Bond?
• Investopedia: What Is a Yield Curve?
• Wikipedia: List of recessions in the United States
• The Yield Curve as a Predictor of U.S. Recessions
• On The Margin: Can the FED control the Yield Curve?
• LongtermTrends: The Real Interest Rate
• LongtermTrends: Bond Credit Yield Spreads