You may have heard through the financial media that the U.S. Treasury yield curve has been flattening, portending a possible recession in the near term. As of this writing, the yield curve is at its flattest point since 2007. Exactly what is the yield curve, and is it truly a good indicator of a future economic downturn?
The Treasury yield curve is, simplified, the difference between the current two-year and 10-year U.S. Treasury bond rates. Ordinarily the two-year rate is lower than the 10-year rate, resulting in a positively sloped curve if you were to graph it. It is a function of the time value of money. If you buy a 10-year bond, you are lending money to the government for 10 years, hence the demand for a higher return as compared to only a two-year loan.