What it does

The shape of the yield curve provides insights into economic cycles. A normal upward-sloping curve suggests economic expansion (long-term rates higher than short-term). An inverted curve (short-term rates higher than long-term) often signals potential slowdown or recession and is one of the most reliable recession predictors.

Reading yield curve shapes

• Normal curve: Long-term rates higher than short-term—healthy economy, expansion
• Flat curve: Similar rates across maturities—economic uncertainty, transition period
• Inverted curve: Short-term rates higher than long-term—recession warning, economic stress
• Steep curve: Strong upward slope—strong growth and inflation expectations

How it works

Think of the Yield Curve as an “economic health thermometer”: we collect Treasury yields across maturities (3m, 2y, 5y, 10y, 30y), plot the relationship between short-term and long-term rates, and analyze the curve shape for economic expectations. The spread (long-term yield minus short-term yield) defines the slope: positive = normal curve, negative = inverted.

Key components

• Short-term rates: 3 months to 2 years—heavily influenced by Fed policy and current conditions
• Long-term rates: 5 to 30 years—reflect expectations for growth, inflation, and monetary policy
• Curve slope: Difference between long- and short-term rates—indicates sentiment about the future
• Curve shape: Normal, flat, inverted, or steep—provides recession and cycle insights

How we use it

For short-term (5-day) analysis: yield curve spreads provide economic context for our model alongside technical indicators. The model learns to recognize expansion vs recession environments, uses inversions to identify high-risk periods, and uses curve shape to predict which sectors will outperform and to adjust volatility expectations.

For long-term (12-month) forecasting: the Macro Model uses yield curve patterns to identify major economic cycles and regime shifts. Inversions help spot prolonged bear market phases; curve steepness helps predict inflation; the model learns when different curve shapes favor growth vs defensive sectors. Yield curve combined with other indicators improves recession/expansion timing.

Why use the yield curve?

• Economic cycle and recession prediction
• Market regime identification and risk assessment
• Sector rotation and asset allocation timing
• Inflation expectations and monetary policy insights
• Portfolio hedging and defensive positioning

Ready to use the Yield Curve in your analysis? Our Macro Model uses the Yield Curve with Policy Rate, inflation, and consumer sentiment to generate 12-month market outlooks and classify regimes.

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