Yield Curve¶
OVERVIEW¶
The yield curve plots yields on U.S. Treasury securities against their time to maturity — from 3-month T-bills to 30-year bonds. It functions as a macro regime signal, not a technical trading indicator, encoding the bond market's collective forecast for growth, inflation, and Federal Reserve policy.
Note
The yield curve does not predict timing. It signals direction and regime. False positives exist, and positioning too early can cause significant opportunity cost.
Curve shapes and their meaning:
| Curve Shape | Description |
|---|---|
| Normal | Upward-sloping; investors demand higher yields for longer maturities |
| Flat | Short and long rates converge; signals transition near Fed peak or trough |
| Inverted | Short-term rates exceed long-term rates; historically associated with recessions |
KEY SPREADS¶
The primary metric tracked on Tapeboard is the 2s10s spread: the 10-year Treasury yield minus the 2-year Treasury yield.
Formula:
| Spread Value | Curve Shape | Market Interpretation |
|---|---|---|
| > +100 bps | Steep | Strong growth expectations, risk-on |
| +1 to +100 bps | Normal | Standard economic expansion |
| −10 to +10 bps | Flat | Transition — Fed near peak or trough |
| < 0 bps | Inverted | Recession signal; expect Fed cuts |
Tip
The 3-month/10-year spread is preferred by some Federal Reserve researchers (including the New York Fed) as a more reliable recession predictor. The 3-month rate tracks the current Fed funds rate more tightly than the 2-year.
HOW TO USE¶
Macro Positioning¶
Use the yield curve to adjust portfolio-level risk exposure based on regime:
| Curve Condition | Suggested Posture |
|---|---|
| Inverted | Reduce equity duration; rotate into defensives (utilities, staples, healthcare) |
| Steepening from inversion | Early-cycle signal; favor cyclicals, financials, small caps |
| Steep / Normal | Risk-on; standard growth positioning |
Sector-Level Application¶
Bank profitability is directly linked to the spread between short borrowing costs and long lending rates.
| Curve Shape | Net Interest Margin Impact | Names to Watch |
|---|---|---|
| Steep | Widens margins — bullish for banks | JPM, BAC, regional banks |
| Inverted | Compresses margins — bearish for banks | JPM, BAC, regional banks |
Note
JPM, BAC, and regional bank equities trade in close correlation with the 2s10s spread. Monitor the spread alongside bank sector moves.
Worked Example — April 2026¶
| Maturity | Yield |
|---|---|
| 3-Month | 4.15% |
| 2-Year | 3.92% |
| 5-Year | 4.10% |
| 10-Year | 4.38% |
| 30-Year | 4.62% |
2s10s spread = 4.38% − 3.92% = +46 basis points → normal, upward-sloping curve.
Compare to July 2023: 2-year at 5.05%, 10-year at 3.97% — a 2s10s of −108 bps, one of the deepest inversions in 40 years. The inversion persisted over two years before normalizing; recession timing remained contested throughout.
LIMITATIONS¶
Note
Federal Reserve quantitative easing suppresses long-end yields artificially, flattening the curve mechanically without reflecting true market expectations. Under yield curve control (e.g., Japan 2016–2024), the signal becomes entirely unreliable.
| Limitation | Detail |
|---|---|
| Timing uncertainty | Predicts direction, not when a recession arrives |
| False positives | The 2022–2024 inversion preceded a significant equity rally before resolving |
| QE distortion | Fed bond-buying compresses long yields artificially |
| Steepening ambiguity | Bull steepening (short rates fall) and bear steepening (long rates rise) have opposite implications for equities and credit |
Re-steepening types:
| Type | Driver | Equity / Credit Implication |
|---|---|---|
| Bull steepening | Short rates fall as Fed cuts | Generally risk-on; favorable for equities |
| Bear steepening | Long rates rise on inflation fears | Risk-off pressure; negative for credit and duration |