GlossaryYield curve
Yield curve
The study condenses the shape of the US yield curve into one number: the ratio of the ten-year to the two-year yield. Above 1, the long maturity yields more than the short one and the curve is normal. Below 1, it is inverted, and an inversion has preceded every US recession of the past decades.
Zones
| Range | Classification | Color |
|---|---|---|
| from 1.02 | Normal curve | green |
| 1.00 to 1.02 | Flat curve | yellow |
| below 1.00 | Inverted | red |
The parity line at 1 is drawn boldly, and a second reference line sits at 1.02. Below 1 the background is tinted red, above 1.02 green.
How to read it
- Normal curve: Investors who tie up their money for longer get more interest. This is the normal state of a growing economy.
- Flat curve: The long maturity's lead is almost gone. Often the transition into or out of an inversion.
- Inverted: The short maturity yields more. The market expects policy rates to fall in the future, usually because it anticipates a slowdown.
Historically, many months often passed between inversion and recession. The recession usually only began after the curve had turned positive again. An inversion is therefore a warning signal with a long and irregular lead time, not a point in time.
Limitations
- Timeframe: The yields are daily values. Intended for 1D, 4D and 1W; on intraday candles, one value stands across many candles.
- Low rates: If the ten-year yield is close to zero, as in 2020, the ratio swings sharply even on small spreads.
- Only two maturities: The study only sees 10 and 2 years. The “US government bonds (yield curve)” study shows the full curve with all maturities.