Yield Curve / Inversion
The gap between long- and short-maturity government bond yields — usually long is higher, and when short rises above long (inversion), it is seen as a recession warning.
In plain terms
Usually the longer you lend money (long-term), the higher the interest you receive. So a 10-year bond yield being higher than a 2-year is normal.
But sometimes this flips and the short-term yield rises above the long-term. This is an "inversion," read as a signal carrying the market's worry that "the near-term economy will worsen."
What it tells you
It shows in compressed form how the market views the economy and rates ahead. A steepening curve means rising growth expectations; flattening or inverting means growing slowdown worry.
Inversion especially has preceded several past recessions, making it one of the most-watched macro signals.
Formula
term spread = long-term bond yield (e.g. 10-year) − short-term bond yield (e.g. 2-year) when this value goes below 0 (short > long), it is a "yield curve inversion."
What high or low means
A sufficiently positive term spread (long > short) is read as a normal state with live expansion expectations.
A negative, inverted spread is read as a slowdown/recession-worry signal, but the lag from inversion to actual recession is long and it is not always right.
An inversion does not always mean "a recession soon." It has often preceded one, but recessions have come 1–2 years after, or not at all. It is not a timing tool.
Which maturities you compare (10-year vs 2-year, 10-year vs 3-month, etc.) gives different signals.
Being a macro signal, it does not apply directly to individual stocks. It is best seen as a reference for reading the whole-market environment.
In the US, the 10-year and 2-year government bond yields inverting has been followed by a recession several times since the 1970s. So this inversion has become the "recession warning" the market and media watch most.
But it has sometimes taken 1–2 years from inversion to an actual recession, and stocks have risen further in between. It shows a signal is only a signal, not a tool for timing.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Yield and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.