The yield curve plots bond yields (interest rates) on the Y-axis against maturity dates on the X-axis. Normally, longer-term bonds pay higher yields than shorter-term ones — you expect more compensation for locking up your money longer. This creates an upward-sloping curve.
The inverted yield curve — when short-term rates exceed long-term rates — is one of the most reliable recession predictors in finance. It has preceded every US recession since 1955 with only one false signal. When investors expect economic trouble ahead, they rush to buy long-term bonds (driving yields down), creating the inversion.
The US Treasury yield curve inverted in 2022 and stayed inverted for a record 793 days. Central banks closely monitor the yield curve for policy decisions. The spread between 10-year and 2-year Treasury yields is the most watched indicator — when it goes negative, markets get nervous.