What is the yield curve, and why do people watch it?

What does the yield curve show?#

A yield is the yearly return an investor earns for lending money, expressed as a percentage. The U.S. government borrows for many different lengths of time, from a few weeks to 30 years; the length is called the maturity. If you plot the yield for each maturity on one chart, from shortest to longest, you get the yield curve. Our note on bond yields explains yields in more detail.

The official U.S. version comes from the Treasury Department, which describes it as a par yield curve derived using a monotone convex method^[1]. The inputs are indicative bid-side price quotes for the most recently auctioned Treasury securities, collected by the Federal Reserve Bank of New York at or near 3:30 p.m. each trading day^[1]. In plain terms: one smooth line, rebuilt every trading day from market prices. For the securities themselves, see Treasury bills, notes and bonds.

What do normal, flat and inverted curves look like?#

When long-term yields are higher than short-term yields, as on September 30, 2026, the curve slopes upward. People often call that a normal curve. When short and long yields are about the same, the curve is flat. When short-term yields are higher than long-term yields, the curve is inverted.

Both lines come from the Treasury's daily tables^[2][3]. Notice that even a "normal" curve is not perfectly smooth: on September 30, 2026 the 20-year yield (5.68%) was slightly above the 30-year (5.64%)^[2].

How do you measure the slope?#

Analysts boil the curve down to one number: the term spread, the gap between a long-term and a short-term yield. The New York Fed describes the slope of the yield curve as the term spread between long- and short-term interest rates^[4]. This note uses two versions: the 10-year minus the 3-month yield, and the 10-year minus the 2-year. A positive spread means an upward slope; a negative spread means inversion.

Yields from the Treasury's tables^[2][3]; the subtraction is done in code. If basis points are new to you, see our basis point definition.

Why are long-term yields different from short-term yields?#

The short end of the curve is tied closely to the Federal Reserve. The Fed notes that rates on commercial paper and U.S. Treasury bills typically move closely with the federal funds rate^[5]. After its September 16, 2026 meeting, the Fed's target range for that rate was 3-3/4 to 4 percent^[6], and the 1-month and 3-month Treasury yields at the end of the month were just above it, at 4.02% and 4.20%^[2].

The long end depends on more than today's policy. In the Fed's words, rates on longer-term loans are related to expectations of how monetary policy and the broader economy will evolve over the duration of the loans, not just to the current level of the federal funds rate^[5]. If investors expect short-term rates to fall in the future, a long-term yield can sit below today's short-term yields — which is one way an inverted curve can form.

Our note on how the Federal Reserve sets interest rates covers the short end in detail, and why bond prices fall when rates rise explains what yield changes mean for people who already hold bonds.

How reliable is an inverted yield curve as a recession signal?#

Its record is the reason people watch it. Economists at the Federal Reserve Bank of San Francisco wrote in 2018 that every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve^[7]. Their term spread was the 10-year minus the 1-year Treasury yield^[7], not either of the two spreads computed above. They added that it had only one false positive, in the mid-1960s, when an inversion was followed by a slowdown but not an official recession^[7].

The lag matters. The delay between the spread turning negative and a recession starting ranged between 6 and 24 months^[7] — a wide window. The New York Fed publishes a model that uses the slope to estimate the probability of a U.S. recession twelve months ahead^[4], which is a probability, not a verdict.

Recent history adds a caution. The curve was deeply inverted in July 2023^[3], yet the NBER's business cycle page still listed April 2020 as the most recent trough, with no later peak, when this note was written in October 2026^[8]. A signal with a strong past record can still miss. For how recessions are dated, see recessions and markets.

What mistakes do beginners make?#

1. Treating an inversion as a recession forecast with a date

   Even in the San Francisco Fed's study the lag ranged from 6 to 24 months, and recent inversions have not been followed by a dated recession so far. It is a warning light, not a calendar.

2. Comparing different spreads

   The 10-year minus 3-month and 10-year minus 2-year spreads can give different readings. Check which one a headline uses before comparing it with past episodes.

3. Assuming the Fed controls long-term yields

   The Fed's target mainly anchors the short end. Long yields depend on expectations and can move in the opposite direction from a Fed decision.

4. Making portfolio moves on one indicator

   No single chart captures the whole economy. Decisions about your own mix of stocks, bonds and cash should rest on your goals and time horizon, not on the shape of one curve.