Reading the Yield Curve

by Doug Drabik of Raymond James, 4/15/26

Yield curves exist for many products and can be interrelated, yet they also carry distinctive characteristics. Normally, long-term rates are higher than short-term rates because investors demand a higher return for lending money over longer periods. This arrangement would create an upward-sloping curve much like the Treasury curves displayed to the right. A “normal” upward slope exists typically when the economy is expected to grow.

Since yield curves often reflect investors' expectations for future rates, they can be both informative and sometimes misleading. More often, they are insightful. In addition, the relative historical level of interest rates is as important as the current relationship between maturities. Note the two Treasury curves above – one being the April 10, 2026, and the other from January 2022. Both are upward-sloping, providing higher rates for longer maturities. However, the current interest rate environment is relatively elevated compared with January 2022. Every maturity today gives an investor a much higher return. When in a historically high-interest-rate environment, it can be advantageous for an investor to lock in for as long as their risk profile and overall goals permit.

When investors expect interest rates to fall, say because they think the Fed is going to cut the Fed Funds rate, interest rates will tend to fall, especially short-term rates. What has been particularly difficult to anticipate is the Fed’s future behavior, largely due to a decision-making dilemma. The Fed is mandated to keep prices stable and to keep employment full. Inflation is an impending threat of higher prices, and the core PCE Index, a key inflation gauge, remains above target at 2.97%, well above the goal of 2.0%. The Fed could raise rates to combat high inflation. At the same time, the labor market appears to be trending downward, and a high unemployment rate would be harmful to the economy. The Fed could lower interest rates to help stimulate the economy and prevent employment from impeding healthy production. This predicament puts the Fed’s policy actions in the crosshairs of uncertainty and, in turn, stirs market volatility. Strong arguments can be made that the Fed’s next move could go either way, although the most likely outcome is that it leaves rates unchanged until there is more clarity on inflation and the labor market.



A normal upward-sloping curve indicates an expectation of economic growth, a flat curve, one of uncertainty, and an inverted curve can signal a recession. An inverted curve is when short-term maturities have higher rates than longer-term maturities. Historically, inverted curves have preceded most US recessions. The Treasury curve, as measured by the 10-year Treasury versus the 3-month T-Bill, was inverted for over two years, from October 2022 to December 2024. Approximately six months later, it inverted on and off for another three months. Since mid-September 2025, the curve has been upward sloping. The last four recessions occurred between 1.5 and 6 months after the inverted curve normalized. We are currently almost 7 months past the last day the curve was inverted. The average expansionary period has increased from 5.7 years (1953-present) to over 8 years (the last 36 years), whereas the average recessionary period remains at 0.9 years.