What the curve actually plots
The yield curve just plots interest rates against how long you're lending money for — three months, two years, ten years, thirty. Normally, longer loans pay more, because you're taking on more risk over a longer time. That's an upward-sloping curve, and it's what "normal" looks like.
Why inversion spooks people
When short-term rates pay more than long-term ones, the curve inverts. It has preceded most recessions in the last fifty years, not because the curve causes anything, but because it reflects what bond investors collectively expect: slower growth and lower rates ahead, priced in today.
What to actually watch
The 2-year vs 10-year spread gets the most headlines, but the 3-month vs 10-year spread has a better historical track record for the Fed's own models. Neither is a timing tool — the lag between inversion and recession has ranged from six months to two years.
