What does an inverted yield curve tell you?

The yield curve plots the yields on government bonds against their maturity. Normally it slopes up, because investors want extra yield for lending for longer. It's inverted when short-term yields are above long-term yields, for example when the two-year Treasury yields more than the ten-year. The main thing it tells you is what the market expects. A long-term yield is roughly the average of the short-term rates investors expect over that period. So if the ten-year yield is below the two-year, investors expect short-term rates to be lower in the future than they are today. The usual reason is that they expect the central bank to cut rates, and central banks cut when growth and inflation are slowing. That's why people watch it as a recession signal. Short rates are high because policy is tight, and long rates are low because the market thinks that tightness will slow the economy. I'd be careful with it, though. It isn't a timing tool, because a recession doesn't always follow quickly. So I'd read it as the bond market's view that policy is tight and cuts are coming.

The yield curve plots the yields on government bonds against their maturity. Normally it slopes up, because investors want extra yield for lending for longer. It's inverted when short-term yields are above long-term yields, for example when the two-year Treasury yields more than the ten-year. The main thing it tells you is what the market expects. A long-term yield is roughly the average of the short-term rates investors expect over that period, plus a term premium for tying money up. So if the ten-year yield is below the two-year, investors expect short-term rates to be lower in the future than they are today. The usual reason is that they expect the central bank to cut rates, and central banks cut when growth and inflation are slowing. That's why people watch it as a recession signal. Short rates are high because policy is tight, and long rates are low because the market thinks that tightness will slow the economy. There's a direct channel too. Banks borrow short and lend long, so an inverted curve squeezes their lending margin and can make them less willing to lend. I'd be careful with it in two ways. It isn't a timing tool. The gap between an inversion and a recession has varied a lot from one cycle to the next, and the signal has been wrong before, so it doesn't tell me when to sell anything. And the term premium can fall for reasons unrelated to growth, like heavy demand for long bonds from pension funds or central bank buying, which pulls long yields down on its own. So I'd read it as the bond market's view that policy is tight and cuts are coming, and I'd check it against credit spreads and the jobs data before calling a recession.