Yield curve inversion
The yield curve plots Treasury borrowing costs across maturities. Normally long rates exceed short ones — investors demand a premium for locking money away. An inversion flips this: short-term yields rise above long-term ones because markets expect the Federal Reserve to cut rates in the future, usually in response to weakening growth.
Why it predicts recessions
Two mechanisms are at work. Expectations: traders pricing future cuts are implicitly pricing future weakness. Credit mechanics: banks borrow short and lend long, so an inverted curve squeezes lending margins and discourages new credit — tightening financial conditions before the slowdown arrives. The 10Y–3M spread has preceded every US recession since the late 1960s, typically by 6–18 months.
Where it fails
It is a warning, not a verdict. Inversions in 1966–67 and 2023–24 produced no recession — the latter becoming the longest false alarm on record, as a deposit glut kept bank margins healthy and the credit channel never bit. That is why this monitor treats the curve as one signal among eighteen rather than a standalone oracle.