Yield Curve Guide
Back1. What Is the Yield Curve?
Think of Treasury bonds as IOUs from the U.S. government. You can lend money for 3 months or for 30 years — and normally, lending longer pays more interest, because more can go wrong over time. The yield curve is simply a chart of those interest rates, from shortest to longest maturities. When it slopes upward (long rates higher than short rates), the bond market is relaxed. When it flattens or flips — short rates above long rates — it's a warning signal.
When the curve inverts — short-term yields rise above long-term yields — it signals that the market expects economic deterioration, lower growth, and eventual Fed rate cuts. Inversions have preceded every U.S. recession since the 1970s.
Normal (Upward Slope)
10Y > 2Y > 3M. Growth expected. Risk appetite healthy. Typical of Quad 1 and early Quad 2.
Flat
Short and long rates converging. Market uncertainty about growth outlook. Transition signal.
Inverted (Downward Slope)
Short rates above long rates. Market pricing in recession and future rate cuts. Spreads go negative.
2. The Four Curve Regimes
The bond market is generally considered smarter than the equity market. The slope of the yield curve — specifically how it is changing — tells you exactly what the bond market expects for growth and inflation. We classify the current state into one of four regimes based on:
- Direction of the 10Y yield — rising or falling (long rates).
- Change in the 10Y–2Y spread — widening or narrowing (relative to 3 months ago).
Short rates falling faster than long rates. Spread widening + long rates falling.
The Fed is cutting rates or signaling cuts. Short-term yields collapse while the long end is sticky (still pricing future growth recovery). Credit is becoming cheaper. This is the most bullish regime for risk assets — the starting gun for a recovery.
↳ What this means for you: Green light for risk assets — lean into equities and high-yield positions.
Long rates rising faster than short rates. Spread widening + long rates rising.
Inflation expectations are rising and the long end is selling off. The Fed hasn't moved yet (or is behind the curve). Growth is still OK but inflation is the dominant concern. A classic reflation environment.
↳ What this means for you: Rotate away from long-duration bonds toward real assets and inflation hedges.
Short rates rising faster than long rates. Spread narrowing + long rates rising.
The Fed is actively hiking to fight inflation. Short-term yields surge while long rates rise more slowly because the bond market is already pricing in a future slowdown. The most hostile environment for equities — tightening conditions with slowing growth ahead.
↳ What this means for you: Raise cash, shorten duration, cut equity exposure — slowdown risk is building.
Long rates falling faster than short rates. Spread narrowing + long rates falling.
Both growth and inflation are cooling. The long end rallies as growth fears dominate. The Fed is on hold or just starting to cut. Curve may be approaching or testing inversion. A classic deflationary setup where long duration bonds outperform.
↳ What this means for you: Shift toward bonds and defensive assets — the market is pricing in a meaningful slowdown.
3. Key Spreads We Track
10Y – 2Y Spread (T10Y2Y)
The most-watched recession indicator. Inverts (goes negative) when the Fed has hiked short rates above where the long end prices future growth. Every U.S. recession since 1955 was preceded by an inversion of this spread.
FRED: T10Y2Y10Y – 3M Spread (T10Y3M)
The New York Fed's preferred recession predictor. Research shows the 10Y–3M spread is even more reliable than the 10Y–2Y at predicting recessions 6–18 months forward. Currently tracked alongside T10Y2Y for confirmation.
FRED: T10Y3M4. Curve Regime → Macro Quad Alignment
The yield curve is a leading indicator that often warns of an economic transition 3–12 months before it shows up in official data. Use it as a forward-looking confirmation signal for the Macro Compass — when the curve regime and the Macro Compass agree, your conviction is higher.
| Curve Regime | Curve Action | Macro Interpretation | Quad Alignment |
|---|---|---|---|
| Bull Steepener | Short rates fall faster than long | Fed cutting; growth bottoming | Early Quad 1 |
| Bear Steepener | Long rates rise faster than short | Inflation expectations rising | Quad 2 |
| Bear Flattener | Short rates rise faster than long | Fed hiking to kill inflation | Late Q2 / Q3 |
| Bull Flattener | Long rates fall faster than short | Growth & inflation cooling | Quad 4 |
Note: The curve regime reflects the bond market's forward-looking view, while the Macro Compass is based on trailing economic data. When the two diverge, it often signals an imminent regime transition.
5. Data Sources
All series sourced from the Federal Reserve Economic Data (FRED) API, updated daily. Spread calculations for T10Y2Y and T10Y3M are pulled directly from FRED pre-computed series rather than derived locally.