Yield curve signals: do you still trust inversions?
The inverted yield curve predicted recessions for decades — then spent years inverted while growth continued. The signal's reputation has changed, and so has how traders use it.
What's your view?
- whether you treat inversion as a warning still
- the alternative signals you've adopted
- how the curve debate shapes your dollar view
Background: bond yields and exchange rates.
Background: Bond yields and exchange rates: why currency traders watch the 2-year yield
Currencies often follow the gap between two countries' government bond yields. How yield differentials work, why 2-year yields track central bank expectations, and when the link breaks down.
Why do currency traders watch bond yields?
Because money tends to flow toward higher returns. The gap between two countries' bond yields, especially 2-year yields that track central bank expectations, often moves in line with their exchange rate.
What is a yield differential?
The difference between the yields on comparable government bonds in two countries, such as US and German 2-year bonds. A gap widening in one country's favour tends to support its currency.
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