How to visualise a yield curve inversion
Quick answer
A yield curve inversion occurs when short-term rates exceed long-term rates. The 10-year minus 2-year Treasury spread is the most-watched measure. Compute it from Treasury daily data using the expression [10 Yr] - [2 Yr]. When this spread goes negative, it has historically preceded every US recession since 1970. The un-inversion often coincides with the recession starting.
What is a yield curve inversion and why does it predict recessions?
A yield curve inversion — when short-term interest rates exceed long-term rates — is one of the most reliable recession predictors in economics. The 10-year minus 2-year Treasury spread has inverted before every US recession since 1970, with only one false signal (a brief inversion in 1998 that preceded a mild slowdown but not a technical recession).
The logic is intuitive: short-term rates reflect current Fed policy (tight money to fight inflation). Long-term rates reflect growth and inflation expectations. When the market expects growth to slow enough that the Fed will eventually cut rates, long-term yields fall below short-term yields.
Which yield curve spread is the best recession predictor?
The 10Y-2Y spread is the most-followed inversion metric, but it's not the only one. Other useful measures:
10Y-3M spread: Some academics argue this is a better recession predictor than 10Y-2Y because the 3-month rate is more directly controlled by Fed policy.
The full curve: Sometimes the entire curve inverts (every maturity yields less than the one before it). Other times only specific segments invert. The breadth of inversion matters.
The 5Y-2Y spread: The belly of the curve. When this inverts, it suggests the market expects rate cuts to begin within 2-5 years.
How do I chart a yield curve inversion?
Upload the Treasury daily rates CSV. Use Quadesto's derived column feature to compute the spreads:
Expression: [10 Yr] - [2 Yr] creates the classic 10Y-2Y spread
Expression: [10 Yr] - [3 Mo] creates the alternative 10Y-3M spread
Quadesto renders the spread as a time series with a zero line clearly marked. When the line crosses below zero, the curve is inverted.
Why is the yield curve un-inversion more important than the inversion?
Here's what many people miss: the inversion itself is the early warning. The un-inversion — when the curve steepens back to normal — often coincides with the recession starting. This is because the Fed is cutting rates (pushing short-term rates down) in response to the downturn.
The pattern: inversion → hold inverted for months → un-inversion → recession begins within 0-6 months of un-inversion.
Watching the spread re-steepen is arguably more important than watching it invert. Quadesto's time series chart makes this trajectory visible at a glance.