You will be able to read the shape of the yield curve and explain the limits of an inversion as a recession signal.
In 2022 Marcus read the same headline every few weeks: the yield curve has inverted, a recession is coming. He trimmed some shares, waited, and watched them rise without him through 2023. The headline wasn't invented. The curve really had inverted, and inversions really have come before most US recessions. What the headline left out was how loose that relationship is, and that's what this lesson is about.
The yield curve plots the yields on a government's bonds against their maturity, from bills of a few months to bonds of thirty years. You met it in How the economy hits your wallet: rates, inflation and cycles, lesson 4.2, Indicators to watch: GDP, hiring, inflation and the yield curve. Here we read it as an analyst does.
Short yields are anchored by the central bank's policy rate, because a three-month bill is close to cash. Long yields reflect two things: what investors expect short rates to average over the bond's life, and a term premium for the risk of holding a long bond, which lesson 2.7 described. So the shape of the curve is the market's rough view of where policy rates are heading, plus a risk premium that moves on its own.
Analysts summarise the shape with a spread between two points. The two most watched in the US are the ten-year yield minus the two-year yield, and the ten-year minus the three-month. With made-up figures, a two-year yield of 4.5% and a ten-year yield of 4.0% gives a 2s10s spread of minus 0.5 points: an inverted curve.
How the curve changes tells you more than one snapshot. When short yields fall faster than long ones, usually because the market expects rate cuts, the curve steepens from the front, which traders call a bull steepening. When long yields rise faster than short ones, often on inflation or supply worries, it steepens from the back, a bear steepening. The flattening versions run the other way.
An inversion means short-term yields sit above long-term ones. The usual reading is that markets expect the central bank to cut rates in future, often because they expect the economy to weaken.
In the US, inversions came before the recessions that began in 2001 and 2008. The curve inverted in 2006 and 2007, more than a year before the 2008 recession started. In 2019 parts of the curve inverted briefly, and a recession followed in 2020, though it was caused by a pandemic that no bond market foresaw, which shows how much luck can sit inside a track record.
The lag between inversion and recession has ranged from several months to around two years. For anyone trying to time the market, that's useless: shares often rise for a long time after the curve inverts, and the drop, when it comes, can begin after the curve has already turned positive again.
And the signal hasn't always worked on its own schedule. Parts of the US curve inverted in 2022 and stayed inverted into 2024, an unusually long stretch. A US recession did not follow in the window that many forecasters expected, and investors who sold on the inversion, as Marcus partly did, missed a strong rise in shares. One explanation economists have offered is that years of central bank bond buying had held long yields down, so the curve looked more inverted than rate expectations alone would have made it.
So treat an inversion as one piece of evidence about the regime in lesson 3.1, Growth and inflation: four regimes and what tends to do well in each. It raises the odds that markets expect weaker growth and lower rates. It says nothing about when, and it shouldn't trigger a trade on its own.
Singapore Government Securities, or SGS, have their own curve, from short-dated bills to long bonds. MAS publishes SGS prices and yields on its website.
SGS yields tend to move closely with US Treasury yields, for the reason How the economy hits your wallet explains in lesson 2.1, Why Singapore interest rates follow the US Fed: MAS manages the exchange rate rather than a domestic interest rate, so Singapore rates are largely set by global rates and capital flows. The level and shape can still differ, because Singapore's inflation, demand for its bonds and expectations for the Singapore dollar differ from America's.
For Marcus, the SGS curve matters directly. His SGD bond fund holds Singapore government and corporate bonds, so a rise in SGS yields at the long end hits it through the duration from lesson 2.5, Duration is the risk number for bonds. And his T-bills and any new SGS purchases are priced off the short end.
For the activity, you'll need two official sources. The US Treasury publishes daily yield curve rates for maturities from one month to thirty years, and MAS publishes SGS yields. Take one day's figures from each, plot yield against maturity on the same chart, and describe each curve's shape in a sentence: upward sloping, flat, inverted, or humped in the middle.
Plot today's US Treasury and SGS yield curves from official sources and describe each shape in one sentence.
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