Yield curve 10-year – 2-year (inverted curve)
Long vs short rates (2 years). Interest rates and cycle.
Updated
What is it?
Compares what the government pays to borrow for 10 years versus 2 years. Normally the longer term pays more.
Spread between the 10-year and the 2-year Treasury yields. Past episodes of stress have often followed a re-steepening after an inversion.
Why does it matter?
When the short term pays more than the long term (an “inverted curve”), a recession usually follows a few months later.
What has happened in other crises?
It inverted before the 2001, 2008 and 2020 recessions and again in 2022-24. In several cycles the sharpest moves came when the curve turned positive again.
When should it be a concern?
It is a concern when the short term pays more than the long term: a classic pre-recession signal. Crisis Monitor turns each reading into a score from 0 to 100 using these bands:
| Situation | Value | What does it mean? |
|---|---|---|
| Calm | ≥ 0.80% | Score 0: no stress |
| Watch | ≤ 0.30% | Score 33: starts to draw attention |
| Stress | ≤ 0.00% | Score 66: risk zone |
| Extreme | ≤ -0.60% | Score 100: like in the worst crises |
Between one band and the next, the score is interpolated. In addition, this curve triggers a quick alarm when it turns positive again after having been inverted.
Yield curve (10Y-2Y) in past crises
Since January 1990, its weekly low was -1.02% (Jun 2023) and its high was 2.89% (Feb 2010). The typical level (the median) is 0.83%.
| Crisis | At the start | Low during the crisis |
|---|---|---|
| 1990-91 recession | 0.30% | 0.30% (Jul 1990) |
| Russia and LTCM 1998 | 0.04% | -0.01% (Jul 1998) |
| Dot-com bubble and 2001 recession | -0.13% | -0.49% (Aug 2000) |
| Global Financial Crisis 2007-09 | 0.54% | 0.53% (Oct 2007) |
| European debt crisis 2011 | 2.72% | 1.52% (Sep 2011) |
| 2015-16 market scare | 1.67% | 1.17% (Jan 2016) |
| Q4 2018 sell-off | 0.21% | 0.12% (Dec 2018) |
| COVID panic 2020 | 0.17% | 0.13% (Feb 2020) |
| 2022 bear market | 0.79% | -0.83% (Dec 2022) |
Weekly data. Crises that do not appear predate the series.
How does Crisis Monitor use it?
- Area: Yield curve and cycle (20% of the index). What the bond market expects from the economy. It often warns months before a recession.
- When does it move? Usually warns early.
- Data frequency: daily.
- Quick alarm: Yes, it is one of the 5 ignition points.
The index combines 17 indicators. See the methodology to learn how it is calculated.
Data source
FRED, Federal Reserve Bank of St. Louis (T10Y2Y). Data may arrive late and does not constitute financial advice.
Frequently asked questions
What is an inverted yield curve?
It is when the 2-year Treasury bond pays more interest than the 10-year. Normally it is the other way round. It signals that the market expects the economy to weaken and rates to fall.
Does an inverted curve always predict a recession?
It inverted before the 2001, 2008 and 2020 recessions, but the warning comes many months ahead and is not infallible: after the 2022-24 inversion there was no official recession.
Why does it worry us when the curve turns positive again?
In several cycles, the worst came when the curve stopped being inverted, because that tends to coincide with Fed rate cuts in an economy that is already slowing. That is why Crisis Monitor triggers an alarm at that moment.