Inverted Yield Curve
Definition
When short-term interest rates exceed long-term rates — the opposite of the normal upward-sloping yield curve.
Explanation
An inverted yield curve is the most reliable recession predictor in finance. Every US recession since 1955 has been preceded by a yield curve inversion (specifically, the 10-year Treasury yield falling below the 2-year). The lag between inversion and recession onset averages 12-18 months, with significant variation. Inversion occurs because bond markets are pricing in future rate cuts (which happen during recessions). The 2022-2024 inversion was the deepest and longest since the early 1980s.
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