Macro and rates
The Yield Curve and the 2s10s Spread, Explained
What the Treasury yield curve shows, how the 2s10s spread is computed, what an inversion has meant for recessions, and how a curve steepens or flattens.
Updated · 4 min read
What the curve shows
The yield curve plots the yield of government debt against its maturity, from one-month bills to the thirty-year bond. For US Treasuries the Treasury Department publishes a par yield curve every trading day: the coupon a new bond at each maturity would have to pay to sell at par. Most charts of "the curve" are that series.
An upward-sloping curve is the normal state. Lenders want more yield to lock money up for ten years than for two, because more can go wrong over ten years and because inflation erodes a fixed coupon. The extra yield for the longer maturity is the term premium, and on top of it the long end carries the market's expectation of where short rates will average over the period.
The short end is anchored by the central bank's policy rate and by expectations of where that rate is going over the next year or two. The long end is pulled by growth and inflation expectations, by how much debt is being issued, and by who is buying it.
The 2s10s spread
The 2s10s spread is the ten-year yield minus the two-year yield, quoted in basis points. A ten-year at 4.30% and a two-year at 3.90% is a 2s10s of +40 basis points. It is the most quoted single number about the curve because the two maturities capture its two ends cleanly: the two-year is almost entirely policy expectations and the ten-year is almost entirely growth, inflation and term premium.
When the two-year yield rises above the ten-year the spread is negative and the curve is inverted. That happens when the market expects the central bank to cut rates: short rates are high now, but the long end is priced for the lower average that cuts would bring. It is a forecast of easing, and easing usually arrives because growth has weakened.
Inversion and recessions
An inverted 2s10s has preceded each US recession since the late 1960s, with a lead of roughly six months to two years, which is why it is watched as a recession indicator. The record has two caveats. The lead is long and variable, so an inversion is a poor timing tool, and equities have often rallied for a year or more after the first inversion. And the inversion that began in July 2022 became the longest on record before the curve turned positive again in 2024, through a period in which the economy kept growing, which has revived the argument that the curve's record owes as much to coincidence as to mechanism.
Academic work from the Federal Reserve has generally found the three-month to ten-year spread the better predictor, because the three-month bill tracks the policy rate exactly, while the two-year already contains the expected cuts. The two spreads usually invert within months of each other.
Steepening and flattening
The curve moves in four distinct ways, and the name says which end moved and which way:
| Move | What happens | Usual cause |
|---|---|---|
| Bull steepener | Short yields fall faster than long yields | Cuts expected or delivered; the start of an easing cycle |
| Bear steepener | Long yields rise faster than short yields | Inflation fears, heavy issuance, a rising term premium |
| Bull flattener | Long yields fall faster than short yields | A growth scare; a flight to safety into long bonds |
| Bear flattener | Short yields rise faster than long yields | Hikes expected or delivered; the middle of a hiking cycle |
"Bull" and "bear" refer to bond prices, which move opposite to yields: a bull move is yields falling. A bear steepener is the one equity markets dislike most, because it raises the discount rate on long-dated cash flows without the comfort of lower policy rates.
Why it matters beyond bonds
Banks borrow short and lend long, so a steep curve widens their margins and an inverted one squeezes them, which is why financials trade on the curve. Growth stocks are long-duration assets, and their valuations are most sensitive to the long end. Mortgage rates follow the ten-year, so housing follows the curve with a lag. And the curve is where the bond market's view of the next two years of policy is written down, in one number, every day.
On the desk
The fixed income page plots the full par curve against the previous close and a month earlier, so a day's move is read as a shape change rather than a list of yields, and quotes the 2s10s and the other spreads that matter beside the live yield indices and the bond ETFs that trade them.
Questions
- What is the 2s10s spread?
- The ten-year Treasury yield minus the two-year Treasury yield, in basis points. It is positive when the curve slopes upward, which is normal, and negative when the curve is inverted, which happens when the market expects rate cuts.
- What does an inverted yield curve mean?
- Short-dated yields are above long-dated yields. The market expects the central bank to cut rates, usually because growth is expected to weaken. An inverted 2s10s has preceded each US recession since the late 1960s, with a lead of about six months to two years.
- What is the difference between a bull steepener and a bear steepener?
- Both widen the gap between long and short yields. In a bull steepener short yields fall faster than long ones, typically as cuts arrive. In a bear steepener long yields rise faster than short ones, typically on inflation fears or heavy issuance. Bull and bear refer to bond prices, which move opposite to yields.
- Why do banks prefer a steep yield curve?
- Banks fund themselves with short-term deposits and lend at longer-term rates. A steep curve means the rate they lend at is well above the rate they pay, widening their net interest margin. An inverted curve compresses or removes that margin.
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