The yield curve is one of three or four charts that working analysts look at every morning. It is also one of the most misrepresented in mainstream financial coverage, where it tends to appear in stories about recessions and disappear from view the rest of the time. The curve is more interesting than the recession framing suggests, and the underlying mechanics are straightforward enough that anyone can read one.
What the chart shows
The US Treasury yield curve is a single line. The horizontal axis is time to maturity (how long the government is borrowing the money for, ranging from one month to 30 years). The vertical axis is the annualised yield (the interest rate the government is paying to borrow that money). Every point on the line is a real, actively traded government bond, and the price of each bond moves continuously during the trading day. The current curve is published daily by the US Treasury on its interest rate statistics page.
On a normal day, the curve slopes upward from left to right. Short-dated borrowing is cheap; long-dated borrowing is more expensive. The reason is intuitive: a lender taking a 30-year credit risk on the US government is exposed to thirty more years of inflation, policy changes, and unforeseen events than a lender taking a one-month risk. The longer lender wants extra compensation for that uncertainty. The extra compensation is called the term premium.
What the curve is actually telling you
Each point on the curve is a market consensus, in real time, about three things rolled together:
- What short-term interest rates will average over the life of the bond. Today’s 10-year yield is, very roughly, the market’s best guess at the average overnight rate over the next ten years.
- The term premium described above, which is the lender’s compensation for accepting the uncertainty of locking up the money longer.
- An inflation expectation, since the lender wants a real return after the value of the dollars they get back is adjusted for what those dollars will buy.
When a financial commentator says the curve is "pricing in" three rate cuts next year, they mean the math implied by the difference between today’s two-year yield and the current one-year yield can only work if the Fed cuts approximately 75 basis points over the next twelve months. The curve does not say so directly. The math is forced on you by the no-arbitrage condition that, at maturity, a holder of two consecutive one-year bonds and a holder of one two-year bond should end up in roughly the same place.
Inversion and the recession signal
An inverted yield curve is one where short-term yields are higher than long-term yields. This is unusual. It means lenders are demanding more return to lock up money for one year than for ten, which only makes sense if they expect short-term rates to fall a lot in the near future. Short rates fall when central banks are easing policy. Central banks ease policy when they see a recession coming or already underway.
For this reason the spread between the 10-year and the 2-year Treasury yields, published as the T10Y2Y series on FRED, is one of the most-watched recession indicators in financial markets. According to the Federal Reserve Bank of Chicago, an inverted yield curve has preceded every US recession since the 1970s. There have also been documented false positives, including 1966 and 1998, where the curve inverted without a recession following.
The lead time is variable. According to a survey by the Federal Reserve Bank of New York, recessions following an inversion have begun anywhere from six to 23 months later, with an average closer to twelve months. The 2022 inversion, which lasted into 2024 without a US recession being declared by the National Bureau of Economic Research at the time of writing, has been called a possible false positive by some analysts and a delayed signal by others.
Practically, the inversion is most useful as a "raise the alert level" signal rather than a "sell everything" signal. Markets typically peak after the inversion begins, sometimes by a long way, which is why simple invert-and-exit strategies have historically underperformed buy-and-hold over multiple cycles.
Why the 10-year minus 3-month spread also matters
While the 10y-2y spread is what most retail commentary focuses on, the spread that the New York Fed uses in its official recession-probability model is the 10-year yield minus the 3-month Treasury bill yield. The two spreads usually move together but can diverge at turning points, and the 10y-3m version is generally regarded as the cleaner signal in academic work because the 3-month rate is more tightly anchored to current Fed policy.
If you only have time to look at one number when you read about the yield curve, the 10y-3m spread is the one to focus on. The New York Fed publishes the implied recession probability monthly.
How to actually use the curve
Most retail investors do not need to trade the yield curve directly. The curve is most useful as a sanity-check on other narratives. If a piece of commentary insists that the Fed is about to slash rates dramatically, the front end of the curve should already reflect that view; if it does not, the commentator is taking a position against the consensus rather than reporting it.
The curve also offers a clean read on what the bond market thinks of inflation. The spread between nominal Treasuries and the equivalent-maturity TIPS (Treasury Inflation-Protected Securities) is the market’s implied inflation rate over that horizon, and it is published as the 10-year breakeven inflation rate on FRED. When that spread starts moving outside its normal range, it is usually a signal worth understanding rather than dismissing.
The chart is freely available, updated daily, and published in clear form by both the US Treasury and the Federal Reserve Bank of St. Louis. It deserves five minutes of your week.