- The US yield curve has been inverted for almost two years, a new record
- But there is no recession in sight…
Yield curves – which visualise how much it costs to borrow money over different timeframes – usually slope upwards. Because of the risks they incur, investors are usually compensated with higher returns when they lock away money over the longer term. This means that there is usually a positive gap between the yields on (say) 10-year and two-year government bonds.
But when the curve inverts, this ‘spread’ turns negative: suddenly, the yield investors earn on short-term bonds exceeds the yield on long-term fixed-income assets. Because the slope of the yield curve fluctuates to reflect changing expectations about the economy, an inversion is (historically) a pretty reliable recession indicator.