Market watchers broke into a collective sweat recently when the yield on 10-year Treasuries sank below the 3-month T-bill yield. When yields on short-term debt exceed those on longer-term bonds, the yield curve—a representation of interest rates on bonds of varying maturities—is said to be inverted. A little perspiration is understandable: An inverted yield curve has preceded each of the past seven recessions, dating back to the mid 1960s.
An inversion is considered a recession indicator because although short-term rates are driven by current Federal Reserve policy, longer-term rates reflect bond investors’ expectations for inflation and future economic growth. When investors believe that the economy will weaken, they tend to pile into the safe haven of longer-term Treasuries, locking in higher rates while they can. In doing so, they bid up the price of long-maturity bonds, driving down yields (bond prices and yields move in opposite directions). A yield curve inversion is an extreme, and rare, no-confidence vote.
As with any economic bellwether, the yield curve isn’t foolproof. Although all recessions since the ’60s have followed inversions, not all inversions have led to recessions. And there is little predictability as to when a recession will hit or how long it will last. Since 1968, the time between the inversion and eventual recession has ranged from five to 16 months.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Moreover, March’s inversion wasn’t severe (a difference of only a few hundredths of a percentage point) or long-lasting (it has since flipped back). Should the long end dip more than 0.5 percentage point below the short end, it would be cause for greater concern, says LPL senior market strategist Ryan Detrick.
Whether the recent inversion is a blip or a harbinger of recession remains to be seen. Regardless, investors should consider it a sign that things are closer to the end than the beginning of the economic cycle, says Sam Stovall, chief investment strategist at research firm CFRA. “By July, it will have been the longest economic expansion in history. Things don’t last forever, right?” he says.
-
US Increasing ESTA Fee to Nearly Double Starting Sept. 30New fee structure hikes ESTA from $21 to $40, adding a new layer to visitor costs under the One Big Beautiful Bill.
-
Can You Afford a Million-Dollar Home on a $250,000 Salary?It’s more than the sticker price — mortgage rates, down payments, taxes and debt all factor into whether a million-dollar home fits your budget.
-
Hot August CPI Report Doesn't Shift the Rate-Cut Needle: What the Experts SayThe August CPI came in higher than forecast on a monthly basis, but Wall Street still expects a rate cut at next week's Fed meeting.
-
Trump's Economic InterventionThe Kiplinger Letter What to Make of Washington's Increasingly Hands-On Approach to Big Business
-
Dismal August Jobs Report Offers Rate-Cut Relief: What the Experts Are SayingThe August jobs report came in much lower than expected, lifting the odds that several rate cuts will come through by year's end.
-
AI Start-ups Are Rolling in CashThe Kiplinger Letter Investors are plowing record sums of money into artificial intelligence start-ups. Even as sales grow swiftly, losses are piling up for AI firms.
-
What is AI Worth to the Economy?The Letter Spending on AI is already boosting GDP, but will the massive outlays being poured into the technology deliver faster economic growth in the long run?
-
Can President Trump Fire Fed Governor Lisa Cook?Markets hate uncertainty, especially when it comes to monetary policy and interest rates, and questions about the Fed are compounding.
-
Powell Signals Rate Cuts in His Jackson Hole Speech. Here's What Wall Street is SayingIn his speech at the Jackson Hole symposium Friday, Fed Chair Jerome Powell said current conditions "may warrant" rate cuts.
-
Kiplinger Special Report: Business Costs for 2026Economic Forecasts Fresh forecasts for 2026, to help you plan ahead and prepare a budget on a range of business costs, from Kiplinger's Letters team.
