The yield curve spread (10-year yield minus 2-year yield) is among the most-watched recession indicators. When short-term yields exceed long-term yields — an "inversion" — recession has followed within 6-24 months in every instance since 1955 (7 for 7).
Inversions in 2000 (tech bust), 2006 (housing crisis), 2019 (COVID), and 2022-2024 each preceded recessions or significant slowdowns. The lead time varies: typically 12-18 months from initial inversion to recession start.
Why does it work? Long-term yields reflect expected future growth + inflation + term premium. When they fall below short rates, markets are pricing in weaker future growth and Fed rate cuts to rescue the economy. For investors: a sustained inversion is a signal to review portfolio risk, not a trading signal in itself.