BONDS · Beginner · 7 min read · 3 Nov 2026 · Navion Pro Research
The Yield Curve: What It Is and Why Traders Watch It
The yield curve sounds technical, but it is just a line joining up the yields on bonds of different lengths. Its shape tells traders what the bond market expects for growth, inflation and interest rates. This guide explains how to read it.
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Key Points
- The yield curve plots the yields on government bonds from the shortest to the longest, such as 3 months to 30 years.
- Normally, longer bonds pay higher yields, so the curve slopes upwards.
- When short yields rise above long yields, the curve is inverted. In the US, this has often come before a recession, but not always, and the timing has varied.
- Traders watch the gap between the 2 year and 10 year US Treasury yields as a quick read on the curve.
What the yield curve is
Governments borrow for different lengths of time, from a few months to 30 years. The yield curve is a chart with time to maturity along the bottom and yield up the side. Join the dots and you have the curve.
- Short yields, such as 3 months and 2 years, mostly reflect where traders expect the central bank to set interest rates in the near future.
- Long yields, such as 10 and 30 years, reflect longer term views on growth and inflation, plus extra reward for tying money up for longer.
Normal, flat and inverted curves
This example is for illustration only. The yields are made up.
| Maturity | Normal curve | Flat curve | Inverted curve |
|---|---|---|---|
| 3 months | 3.0% | 4.0% | 5.0% |
| 2 years | 3.4% | 4.0% | 4.6% |
| 5 years | 3.8% | 4.0% | 4.2% |
| 10 years | 4.2% | 4.1% | 4.0% |
| 30 years | 4.6% | 4.1% | 4.1% |
- Normal: yields rise steadily with time. Lenders want more reward for lending for longer.
- Flat: short and long yields are about the same.
- Inverted: short yields are above long yields. Lenders accept less to lend for longer.
What each shape can signal
| If the curve is | Then traders often read it as |
|---|---|
| Normal and upward sloping | Steady growth expected, with no big change in rates |
| Flattening | Growth may be slowing, or the central bank is raising short term rates |
| Inverted | Traders expect rates to fall in future, often because they expect the economy to weaken |
| Steepening from inverted | Rate cuts may be coming, or longer term inflation worries are rising |
A pattern, not a rule.
An inverted curve is the bond market saying it expects today's high short term rates not to last.
In the US, an inverted curve has come before most recessions of recent decades. But the gap between the inversion and any recession has varied a great deal, and an inversion is not a guarantee. Treat it as one signal among many.
The 2 year and 10 year gap
Traders often sum up the curve with one number: the 10 year yield minus the 2 year yield.
| Curve | 10 year yield | 2 year yield | The gap |
|---|---|---|---|
| Normal | 4.2% | 3.4% | 10 year is 0.8 points above |
| Flat | 4.1% | 4.0% | 10 year is 0.1 points above |
| Inverted | 4.0% | 4.6% | 10 year is 0.6 points below |
The figures follow the made up curves in the example above. When the 10 year yield is below the 2 year yield, the curve is inverted.
Steepening and flattening
The curve changes shape as yields move by different amounts:
- Steepening: the gap between long and short yields widens. This can happen when short yields fall as rate cuts come closer, or when long yields rise on inflation or borrowing worries.
- Flattening: the gap narrows. This can happen when short yields rise as the central bank raises rates, or when long yields fall as growth worries build.
Why the curve steepens or flattens matters as much as the fact that it does. A curve that steepens because short yields fall on expected rate cuts can mean something very different from one that steepens because long yields jump on inflation fears.
Why the curve matters for other markets
- Banks often borrow short and lend long, so a steeper curve can help their profits and a flat or inverted one can squeeze them.
- Shares can come under pressure when the curve inverts, as traders worry about a slowdown.
- Currencies react to shifts in short yields, which reflect expected central bank moves.
- Gold can benefit when traders expect rate cuts, as an inverted curve suggests.
When the curve moves, in US Eastern time
| Event | Time (ET) | Which end of the curve it moves most |
|---|---|---|
| US inflation and jobs figures | 08:30 | Both ends, often short yields most |
| Treasury auction results for most notes and bonds | Soon after 13:00 | The maturity being sold |
| Federal Reserve decision | 14:00, with the press conference at 14:30 | Short yields most |
These times follow US clocks, so they stay the same in ET all year. The US is on daylight time (EDT) from the second Sunday in March to the first Sunday in November, and on standard time (EST) for the rest of the year.
Risk disclosure: Trading involves significant risk of loss and is not suitable for all investors. Past performance is not indicative of future results. This brief is for information and education only. It is not investment advice, a recommendation or an instruction to buy or sell anything. The likely market reactions described here are our assessments of what could happen, not predictions, and markets can and often do move differently. Figures and forecasts come from third party sources and may change. Make your own decisions, and consider independent advice if you are unsure.
