2. So this is about the longer term?
Yes. Most of the time, bond investors demand a higher yield, or return, for the greater uncertainty that comes with locking away their money for longer periods. So yield curves usually slope upward. The most alarming state is a yield curve inversion, which happens when, say, 10-year Treasury bonds start yielding less than two-year bonds. It is a sign that bond investors expect interest rates to decline in the longer term, a reflection of a slowing economy and one that in the past has signalled a recession. That was the state of things before the curve began reversing the scale of its inversion and returning toward a more normal one.
Economists often look to the US Treasury bond market for clues about when a recession might come. Specifically, they examine the so-called yield curve. When it is “inverted,” as it has been since about mid-2022, that almost always means a US recession is looming. But by mid-2023, the curve began to “dis-invert” — or steepen in industry parlance — in a way that raised the question of whether the US had managed to dodge a recession or whether one was about to start.
1. What’s the yield curve telling us?
Things are definitely on the move, with rapid shifts in expectations for interest rates. That is on display with shifts in the yield curve — the graph plotting the level of interest rates on federal government bonds maturing anywhere from one month to 30 years. On Oct 5 and Oct 12, yields on longer-dated bonds pushed sharply higher on expectations that the US economy’s strength means the Fed will hold rates “higher for longer”.
