SignalFrogThe yield curve shows what bonds from the same issuer pay across different maturities. Normally it slopes upward: lending money for ten years demands more compensation than lending it for two. That premium is the price of uncertainty and of opportunities foregone.
What inversion means
The curve is inverted when short maturities pay more than long ones. The market is saying two things at once: the central bank is holding short rates high to slow the economy — and investors expect it to succeed, so that rates will fall again later.
That expectation is the signal. Anyone buying long-dated bonds while short ones pay more is betting on worse times ahead.
The track record
In the United States, every recession since 1955 was preceded by an inversion of the spread between ten-year and two-year Treasuries. That is a remarkable record for a single indicator.
Why it is not enough on its own
Two caveats carry weight. First, central bank bond buying distorts the long end; the curve then partly measures monetary policy rather than market expectation. Second, there have been false signals: an inversion in 1966 was followed not by a recession but by a slowdown.
This is why the yield curve does not stand alone in our model but sits as one of several components in the macro layer.