Making economics interesting

 The US yield curve. It is essentially a plot of interest rates based on different maturities of US government bonds. Why should you care? Because the yield curve can say a lot about the economic outlook and what financial markets are thinking in terms of risks to that outlook. For example, an upward sloping yield curve suggests economic growth, inflation and interest rates are likely to be higher in the future, whereas a downward sloping (or inverted) yield curve suggests an increasing concern for the economic outlook, and an increased risk of recession.

Lately, the yield curve has received a lot of attention of late because of what it might say about the outlook. As the US Federal Reserve began raising interest rates last week and signalled more rate hikes were on the way, the difference between longer-dated bond yields (10 year or 30-year) and shorter-dated bond yields (2-year) has narrowed. ie. instead of an upward sloping yield curve, the yield curve has flattened, suggesting an increasing concern about the economic outlook.

As the Fed continues to lift rates this year, there is a good chance that the yield curve will invert. Now, an inverted yield curve doesn't necessarily mean that recession will occur, but it does highlight that the risks of a recession has increased.

It is also an ominous sign given that when the 2 and 10-year spread turns negative, it has been a very good predictor of recessions in the past.