Yield Curve Inversion
When shorter-term government bonds yield more than longer-term ones, flipping the yield curve's normal upward slope.
What it is
The yield curve is a chart plotting the yields on government bonds against how long until they mature — from bills maturing in a matter of weeks out to bonds maturing in 30 years. Normally it slopes upward: lenders want a bit more yield to tie money up for longer. An inversion is when that slope flips over some stretch of the curve, so a shorter-dated bond yields more than a longer-dated one. It is not a single number but a shape, and people usually point to a specific pair of maturities — the 2-year versus the 10-year, or the 3-month versus the 10-year — when they say "the curve inverted."
Why it matters
The curve's shape aggregates what bond markets collectively expect about future short-term interest rates. An inversion means investors are accepting a lower yield to lock money up for longer. That is usually read as an expectation that short-term rates will be lower in future than they are now — often because the economy is expected to weaken enough that a central bank cuts rates. It is a reading, not a measurement: a curve can also invert because the extra compensation demanded for holding longer bonds has shrunk, rather than because cuts are expected. Historically, inversions of certain maturity pairs have preceded US recessions, which is why the shape draws so much attention. That is a historical correlate, not a forecast, and the sample of past recessions is small.
How it's calculated
Take the published yield on a longer-maturity government bond and subtract the yield on a shorter-maturity one; the result is called a spread. A negative spread means that segment of the curve is inverted. The underlying yields come from official sources: the US Treasury publishes daily par yield curve rates across maturities, and the Bank of Canada publishes Government of Canada benchmark bond yields. Different observers watch different pairs (10-year minus 2-year, or 10-year minus 3-month), so the curve can be inverted on one measure and not another at the same time. Some measures use forward rates rather than spot yields.