Yield curve inversion explained: a classic recession indicator
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By Ken Chigbo, Founder, KenMacro. Published 2026-05-12.
Quick answer
Yield curve inversion describes the unusual condition where short-term Treasury yields sit above long-term Treasury yields. The 2s10s curve (2-year yield minus 10-year yield) inverting (going negative) has preceded every US recession since 1955 with one false signal, on lags of 6 to 24 months. The 3m10y curve is the New York Fed's preferred recession-probability input.
Quick answer
Yield curve inversion describes the unusual condition where short-term Treasury yields sit above long-term Treasury yields. The 2s10s curve (2-year yield minus 10-year yield) inverting (going negative) has preceded every US recession since 1955 with one false signal, on lags of 6 to 24 months. The 3m10y curve is the New York Fed's preferred recession-probability input.
What is yield curve inversion?
Yield curve inversion is the condition in which short-term Treasury yields sit above long-term Treasury yields. The two most widely watched curve segments are the 2s10s (2-year yield minus 10-year yield) and the 3m10y (3-month bill yield minus 10-year yield). A negative 2s10s spread means the 2-year sits above the 10-year, an inversion of the normal upward-sloping curve. Inversions arise when the market expects future short-term rates to fall (typically because the central bank is expected to cut rates) and prices longer-dated bonds to reflect that expectation. The current condition of each curve segment is published in real time on FRED, Bloomberg, and the KenMacro daily desk read.
How traders use yield curve inversion
Macro traders treat the yield curve as a primary recession-probability signal, not a trading-timing tool. The 2s10s inverting has preceded every US recession since 1955 with one false signal (1966), on lags of 6 to 24 months. The New York Fed publishes a monthly recession probability model based on the 3m10y curve; readings above 30 per cent historically precede recession within 12 months. The signal is used to position medium-term portfolios defensively, not to short equities immediately. The desk references current curve readings when discussing the macro regime. Curve steepening from inversion (the 2s10s rising back toward positive) often precedes recession onset itself, the bull steepening as the front end falls faster than the long end on rate-cut pricing.
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Worked example with the yield curve
Consider the 2022-24 inversion cycle. The 2s10s inverted in mid-2022 as the Fed hiked aggressively, with the 2-year yield rising past 4.5 per cent while the 10-year sat near 3.8 per cent (a negative 70 basis-point spread). The inversion persisted through 2022, 2023, and into 2024, the longest sustained inversion since the 1970s. The 3m10y New York Fed recession-probability model registered above 60 per cent for much of 2023. Recession did not materialise on the classical 6 to 24 month lag, prompting debate over whether the indicator had broken down. The curve began bull-steepening in late 2024 as rate-cut expectations built, with the 2-year falling faster than the 10-year. The episode remains a live debate in macro circles.
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Frequently asked
What is the current state of the yield curve?
The current state of the 2s10s and 3m10y curves is published in real time by the US Treasury Department, the Federal Reserve Bank of St Louis FRED database, and the KenMacro daily desk read. The New York Fed publishes a monthly recession probability model based on the 3m10y curve. Both are free and public data.
Does yield curve inversion always predict recession?
Yield curve inversion (2s10s going negative) has preceded every US recession since 1955 with one false signal in 1966. The lag between inversion and recession ranges 6 to 24 months. The 2022-24 inversion has not yet produced a recession on the classical lag, prompting debate over whether the indicator has broken down or whether the lag has lengthened.
Why does the yield curve invert?
The yield curve inverts when the market expects future short-term rates to fall, typically because the central bank is expected to cut rates in response to recession or disinflation. The longer-dated bonds price that expectation, while shorter-dated bonds reflect current high policy rates. The inversion is a market-priced signal of expected policy reversal.
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