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Fundamental analysis

Yield curve

By Jarosław Wasiński • Published: • Updated:
A plot of yields against maturities for comparable debt instruments at a stated time. Its slope and shape reflect expected rates, risk premia and other influences. An inverted curve can be a recession indicator in some settings, but it neither guarantees a recession nor specifies a reliable countdown or FX direction.
Example.

On a hypothetical curve, the two-year yield is 4.5% and the ten-year yield 4.0%. The 10Y−2Y spread is −0.5 percentage point, or −50 basis points. This is inversion of one segment, not a recession date or certain EUR/USD direction.

Comparable instruments

A curve requires consistent issuer or risk, currency and conventions. Coupon, zero-coupon and forward curves are different representations. Do not combine arbitrary bonds without accounting for these differences.

Level and slope

A steep, flat or inverted segment can be described by a spread such as 10Y−2Y. Curves can shift in parallel or change shape. Slope contains rate expectations and term premia, not only a central-bank forecast.

Use in FX

Compare both currencies' changes over the same tenor. Rising yields may reflect rate expectations, inflation or risk, so FX significance is not always positive. Historical signals require context and uncertainty assessment.

FAQ

Does every inversion predict a recession?

Not with certainty. Predictive properties depend on the market, period and curve segment.

Is a yield curve a path of future policy rates?

No. It also contains premia and instrument conventions; an implied forward rate is not a pure forecast either.

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Jarosław Wasiński

Editor-in-chief, ForexMechanics.com • Macro & FX analyst

Independent analyst and practitioner with over 20 years of experience in financial markets. Actively involved in Forex since 2007, with a focus on fundamental analysis, OTC market structure, and disciplined capital risk management.

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