Yield curve inversion
A state in which shorter-maturity yields exceed longer-maturity yields, usually read as a sign the market expects weaker growth or lower rates ahead.
An inversion occurs when a shorter bond yields more than a longer one, so the curve slopes downward over that segment. It usually reflects expectations that policy rates will fall, often because growth is weakening. Inversions have preceded many US recessions, but the lead time varies widely and false signals occur.
On our site, an inversion is marked on the curve chart and in the spread history. Check how long the inversion has lasted and whether the front end or the long end is moving.
Traders care because an inversion squeezes bank lending margins, and investors position for rate cuts when it appears. The reversal, when the curve steepens again, is often watched as closely as the inversion itself.
Worked example (illustrative numbers, not real data): the two-year yields 4.9 percent and the ten-year 4.5 percent. The 2s10s spread is negative 40 basis points, so the curve is inverted. If the two-year falls to 4.0 percent as cuts are priced in, the spread turns positive at 50 basis points, with the steepening coming from the front end.