What's an inverted yield curve? What does it mean for you?

June 30, 2019

It’s possible you may have heard the term inverted yield curve by reading about it in a financial publication¹ or while aimlessly surfing through the 500 channels offered by your cable provider.

Simply put, an inverted yield curve means the yield on a Treasury bond that matures in 10-years is lower than the yield provided by a Treasury certificate that matures in 3-months. This relationship shows the lack of confidence investors have in longer-term bonds and is considered an indicator that a recession is coming.  When that ‘curve’ slopes down, it represents an inversion. 

As noted by Vanguard², “Historically, an inverted yield curve typically lasting more than a month has reliably predicted recessions. In fact, since 1970, an inverted yield curve has preceded all seven U.S. recessions. The time between an inverted curve and the subsequent recession has ranged from 5 to 17 months.”

Is this time different? While there’s no doubt a recession is in our future (recessions are an inevitable component of all business cycles), a recession may not necessarily be in our immediate future. The argument for a delay in the onset of a recession is that the economy is in generally good condition. Households, for example, don’t hold the debt they held during the Great Recession. Similarly, we don’t have the housing bubble that we had 12 years ago that negatively impacted the economy in 2008-2009. Also, the debt held by corporations has a much lower interest rate than it did in 2008, which means companies are better able to service that debt.

There are other events that can potentially impact the severity and even the timing of the next recession. The best action to take in the interim? Rebalancing portfolios. Trying to time the market – like predicting when a recession will occur and how much the stock market may fall – is still a bad option

¹ Nathanson, Michael J., et al. “Gauging the next Recession's Severity.” Financial Advisor Magazine, June 2019, pp. 35–38.

²  Staff, Vanguard. “What the inverted yield curve might mean.” Market Perspectives. 20 May 2019.

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