Reading the shape
Normally investors demand more to lock up money longer, so the curve slopes upward. When the Fed raises short-term rates aggressively, short yields can top long ones—an inversion. Term structure theories explain why the curve takes each shape.
Do inversions predict recessions?
Estrella and Mishkin (1998) showed the spread is a strong recession predictor, and an inversion preceded nearly every U.S. recession since the 1970s. But the inversion that began in 2022 lasted about two years without an immediate recession, a reminder that lags are long and variable. Treat it as one signal among many.
FAQ
- Should I sell stocks when the curve inverts?
- Not necessarily—recessions have followed 6–24 months later, and stocks often rose in between.
- What is steepening?
- When the gap between long and short rates widens.
Sources reviewed: 2026-10-26
References
- Estrella, A., & Mishkin, F. S. (1998). Predicting U.S. recessions: Financial variables as leading indicators. Review of Economics and Statistics, 80(1), 45–61.
- Federal Reserve Bank of New York. The Yield Curve as a Leading Indicator.