The Yield Curve
Why the shape of a single line predicts recessions better than any economist — and how bond traders use it to make billions.
The yield curve plots interest rates for government bonds across time horizons. Short-term bonds pay lower rates because risk is minimal. Governments won't default in two years. Long-term bonds pay higher rates compensating investors for uncertainty. The normal curve slopes upward. Short rates lower, long rates higher. An inverted yield curve occurs when short-term rates exceed long-term rates. Investors so concerned about future weakness, except low returns on long-term bonds. The inversion signals recession is coming. In every recession since 1970, the yield curve inverted first. Economists watch the curve like sailors watch the sky before storms approach. The yield curve works as a reliable recession predictor because it reflects collective expectations of millions of investors and institutions.
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