The Yield Curve Explained: Normal, Flat and Inverted Curves
What normal, flat and inverted yield curves mean, how to measure the spread, what inversions preceded historically, and why the 2022–2024 inversion was not followed by a recession.
What is the yield curve?
The yield curve plots Treasury yields against maturity: it is normal when long-term yields are above short-term ones, flat when they are about equal, and inverted when short yields are higher; the 10-year minus 3-month spread turned negative before each of the four US recessions since 1990, 8 to 16 months ahead.
An inversion is a warning, not a timer. The lead time has varied, the most recent long inversion (2022 to 2024) has not been followed by a recession as of September 2026, and the curve is shaped by expectations of future interest rates as much as by recession risk. This guide explains the three shapes, shows how to measure the spread and the rate path an inverted curve implies, and sets out the historical record with its sources.
Compare Short and Long Bonds With the Bond Yield CalculatorEnter two bonds with different maturities to compare their yields to maturity and their duration, the two things the curve trades off.What the Yield Curve Plots
Each point on the curve is the yield to maturity of a Treasury security of a given term, from one month to 30 years. The US Treasury publishes these "constant maturity" yields every business day, and the Federal Reserve Bank of St. Louis republishes them in its FRED database. Because every point has the same issuer, the US government, differences along the curve reflect time, not credit risk.
Three Shapes of the Yield Curve (Illustrative Yields)
Hypothetical yields chosen to show each shape; they are not market data.
- Normal
- Flat
- Inverted
Normal: long above short. Flat: little difference. Inverted: short above long.
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| Shape | Spread (long minus short) | What it usually reflects | What it means for a saver |
|---|---|---|---|
| Normal (upward sloping) | Positive | Markets expect short rates to hold or rise, and lenders want extra yield for tying money up longer | Longer bonds and CDs pay more, in exchange for more interest rate risk |
| Flat | Near zero | A transition: often seen when the central bank has raised short rates toward where long rates already are | Little reward for extending maturity |
| Inverted (downward sloping) | Negative | Markets expect short rates to fall, often because they expect the economy to slow | Short maturities pay more than long ones; extending maturity lowers yield |
How to Measure the Slope: The Spread
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| Yields | Calculation | Spread | Reading |
|---|---|---|---|
| 10-year 4.00%, 3-month 4.60% | 4.00% − 4.60% | −0.60 points (−60 basis points) | Inverted at 10y–3m |
| 10-year 4.30%, 2-year 3.85% | 4.30% − 3.85% | +0.45 points (+45 basis points) | Normal at 10y–2y |
The two spreads can disagree, because they compare the 10-year yield with different short rates. That is why a headline saying "the curve inverted" should always say which two maturities it means.
Why a Curve Inverts: The Rate Path It Implies
A 2-year bond and two back-to-back 1-year bonds cover the same two years. If investors expected them to earn different amounts, money would move until they did not. So the 2-year yield embeds a forecast of the 1-year rate one year from now, called the implied forward rate. When the curve is inverted, that implied future rate is below today's short rate: the market is pricing in rate cuts.
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| Curve | 1-Year Yield | 2-Year Yield | Implied 1-Year Rate in One Year | Implied Move |
|---|---|---|---|---|
| Inverted | 4.50% | 4.00% | 1.04² ÷ 1.045 − 1 = 3.50% | Down 1.00 point |
| Flat | 4.00% | 4.00% | 1.04² ÷ 1.04 − 1 = 4.00% | No change |
| Normal | 3.50% | 4.00% | 1.04² ÷ 1.035 − 1 = 4.50% | Up 1.00 point |
Check the inverted case with $10,000. Two years at 4.00% grows to $10,000 × 1.04² = $10,816.00. One year at 4.50% gives $10,450.00, and reinvesting that at the implied 3.50% (3.5024% before rounding) for a second year also gives $10,816.00. If you expected next year's rate to be higher than 3.50%, the two 1-year bonds would be the better bet; if lower, the 2-year bond would be.
What Inversions Have Signalled Historically
Two Federal Reserve studies summarise the record. Estrella and Trubin of the New York Fed (Current Issues in Economics and Finance, Volume 12, Number 5, July/August 2006) reported that all six NBER recessions since 1968 were preceded by at least three negative monthly averages of the 10-year minus 3-month spread in the twelve months before the recession began, with no false signals on a monthly-average basis over that period, and cautioned that daily or intraday inversions often prove to be false signals (https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci12-5.pdf). Bauer and Mertens of the San Francisco Fed (Economic Letter 2018-07, March 5, 2018) found that a rule predicting a recession within two years whenever the 10-year minus 1-year spread is negative correctly signalled all nine recessions since 1955, with one false positive in the mid-1960s, and that the delay from inversion to recession ranged from 6 to 24 months (https://www.frbsf.org/research-and-insights/publications/economic-letter/2018/03/economic-forecasts-with-yield-curve/).
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| First negative month (FRED T10Y3M) | Business-cycle peak (NBER) | Lead time | Note |
|---|---|---|---|
| June 1989 | July 1990 | 13 months | Brief inversion: 5 negative months in 1989 |
| July 2000 | March 2001 | 8 months | |
| August 2006 | December 2007 | 16 months | |
| May 2019 | February 2020 | 9 months | The 2020 recession followed the COVID-19 pandemic, which no bond market forecast |
| November 2022 | None dated as of September 2026 | — | Spread negative every month from November 2022 to November 2024 |
Months From First Negative 10y–3m Monthly Average to the Recession Peak
1990 recession
2001 recession
2008 recession
2020 recession
Sources: FRED series T10Y3M monthly averages; NBER business cycle peaks. The recession is dated from the NBER peak month.
Table sources: monthly averages of FRED series T10Y3M (https://fred.stlouisfed.org/series/T10Y3M, retrieved September 27, 2026) and NBER's business cycle chronology (https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions, checked September 27, 2026; the page lists February 2020 as the most recent peak and April 2020 as the most recent trough). Lead times are counted from the first negative month to the peak month.
The 2022–2024 inversion
The most recent inversion was the longest in the monthly data. The 10-year minus 2-year spread averaged below zero in every month from July 2022 to August 2024 (26 months), and the 10-year minus 3-month spread in every month from November 2022 to November 2024 (25 months). Its lowest monthly average was −1.73 points in May 2023. As of September 2026, NBER has not dated a business-cycle peak after February 2020. Either the signal failed this time, or the lag is longer than in past cycles; the data so far cannot tell which, and that is the honest limit of the indicator.
How to Read an Inversion Sensibly
- Say which spread. The 10-year minus 3-month and 10-year minus 2-year spreads can have opposite signs on the same day.
- Use monthly averages, not a single day. The New York Fed study found daily inversions often proved to be false signals.
- Treat it as a probability, not a date. Historical lead times have ranged from about half a year to two years.
- Remember that recessions are dated after the fact. NBER announces peaks months after they happen, so a recession can begin before anyone can confirm it.
- Watch the un-inversion too. The 10-year minus 3-month monthly average had turned positive again by February 2001 and June 2007, before the recessions that followed, and was positive from October 2019 to January 2020. The end of an inversion is not an all-clear.
What the Curve Means for Your Own Bonds and Savings
For a saver the practical question is whether extending maturity is paid. On a normal curve, a longer CD or bond pays more, at the cost of more interest rate risk. On an inverted curve, a short maturity pays more today, but you face reinvestment risk: if rates fall as the curve predicts, the money comes back to be reinvested at lower yields. A bond ladder splits the difference by holding every maturity at once, so whichever way rates move, only part of the money is reinvested at the new rate.
If you hold a bond fund, the curve also affects its yield as holdings roll over; see bond funds vs individual bonds. And because Treasury, corporate and municipal yields each sit on their own curves, compare like with like; the Treasury vs corporate vs municipal bonds guide covers the spreads between them.
Frequently Asked Questions
What does an inverted yield curve mean?
Short-term Treasury yields are above long-term ones. It usually means markets expect short-term rates to fall, often because they expect the economy to slow. In the worked example, a 1-year yield of 4.50% and a 2-year yield of 4.00% imply a 1-year rate of about 3.50% a year from now.
Does an inverted yield curve always mean a recession is coming?
No. Before 2022 the monthly-average signal had a strong record: a San Francisco Fed study found an inversion before all nine recessions since 1955, with one false positive in the mid-1960s. But the curve was inverted from 2022 to 2024 and, as of September 2026, NBER has not dated a new recession.
How long after an inversion does a recession usually start?
The San Francisco Fed study put the delay at 6 to 24 months. Using the 10-year minus 3-month spread, the first negative monthly average came 8 to 16 months before each of the four recessions that began between 1990 and 2020.
Which spread matters more, 10-year minus 2-year or 10-year minus 3-month?
Both are widely watched. The 2006 New York Fed study used the 10-year minus 3-month spread for recession prediction, while market commentary often uses 10-year minus 2-year. They usually move together but can have opposite signs: in five months of 2025 the 10-year minus 3-month monthly average dipped just below zero while the 10-year minus 2-year stayed positive.
What is a flat yield curve?
A curve where short and long yields are about the same, so a spread near zero. It often appears between a normal and an inverted curve, for example while a central bank is raising short-term rates.
What is a normal yield curve?
An upward-sloping curve: longer maturities yield more than shorter ones, giving a positive spread. It reflects expectations that short rates will hold or rise, plus a term premium for holding longer bonds.
Should I buy long-term bonds when the curve is inverted?
That is a trade-off rather than a rule. Long bonds pay less than short ones on an inverted curve but lock in that yield if rates later fall; short bonds pay more now but must be reinvested at whatever rates prevail. Many investors spread maturities with a ladder instead of choosing one end.
Where can I see the current yield curve?
The US Treasury publishes daily par yield curve rates, and FRED republishes them with charts, including the ready-made spreads T10Y2Y and T10Y3M. The values change every business day, so check the source rather than relying on a figure in an article.
Sources
- Estrella, A. and Trubin, M. R., "The Yield Curve as a Leading Indicator: Some Practical Issues," Federal Reserve Bank of New York, Current Issues in Economics and Finance 12(5), July/August 2006: https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci12-5.pdf
- Bauer, M. D. and Mertens, T. M., "Economic Forecasts with the Yield Curve," FRBSF Economic Letter 2018-07, March 5, 2018: https://www.frbsf.org/research-and-insights/publications/economic-letter/2018/03/economic-forecasts-with-yield-curve/
- FRED, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity (T10Y3M): https://fred.stlouisfed.org/series/T10Y3M
- FRED, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y): https://fred.stlouisfed.org/series/T10Y2Y
- NBER, US Business Cycle Expansions and Contractions: https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
Related Guides and Calculators
- How to Build a Bond Ladder — hold every maturity at once instead of betting on the curve.
- Bond Duration & Interest Rate Risk Explained — how much a longer bond's price moves when rates change.
- How to Calculate Bond Yield — the yield to maturity that every point on the curve represents.
- Inflation Impact on Savings — why nominal yields need an inflation comparison.
- Bond Yield Calculator — yield to maturity and duration for any bond.
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