Cash News
The economy is in murky waters. Just a few months into 2025 and the stock market has taken a nosedive. Meanwhile, nearly 222,000 jobs have already been cut.
Given the uncertain state of the economy — and perhaps your shrinking retirement balance — you may be wondering where to put your money this year.
We can only make educated guesses about what will happen next, but a tool called the “yield curve” is helpful for forecasting. In fact, not only can it give you a snapshot of what’s happening with interest rates, but it’s also one of the best predictors of where the economy is going.
Read more: 2025 financial forecast: What to expect in mortgages, investing, banking, and credit cards
A yield curve is a graphical illustration showing the yields — or returns investors can anticipate — from bonds with equal credit quality but varying maturity dates.
In particular, the yields on Treasury-backed investments can be helpful indicators of where the economy is headed. This includes the following securities, all of which have fixed interest rates:
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Treasury bills (T-bills)
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Treasury notes (T-notes)
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Treasury bonds (T-bonds)
In essence, the yield curve gives you an easy way to see whether investing in short-term Treasurys will yield higher rates than investing in long-term Treasurys or vice versa.
Economists often look at the difference between 10-year and two-year Treasury rates, also known as the 10-2 spread, to see signals of a coming recession as far as 24 months in advance.
Read more: What is the 10-year Treasury note, and how does it affect your finances?
To read a yield curve graph, look for the maturity dates along the x-axis (horizontal) and interest rates, or yields, on the y-axis (vertical). These are the main types of yield curves you’ll see:
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Normal yield curve: A typical upward slope occurs when short-term interest rates are lower than long-term rates.
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Flat yield curve: Rates are similar for short- and long-term investments.
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Inverted yield curve: A downward or inverted curve shows that short-term interest rates are higher than long-term rates.
When the yield curve is tipped upward, it means you can earn better returns by investing in long-term Treasurys like bonds than in short-term alternatives like T-bills. It’s also a sign that the economy is healthy and growing. The steeper the curve, the stronger the growth.
The yield curve usually slopes upward, hence the term “normal.” That’s because investors typically earn higher rates as a reward for committing to longer investment terms.
A downward or “inverted” yield curve is rare — but worth paying attention to — since it’s usually a sign that an economic slowdown or even a recession is coming. In fact, every recession since 1960 has been preceded by an inversion.
These are the main causes of an inversion:
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A recent rate hike on short-term securities
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The Federal Reserve is expected to cut interest rates
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Low inflation or deflation are expected
When the yield curve is inverted, you can usually expect to see interest rates drop on all financial products. So during an inversion, you might want to invest your cash in fixed-rate products before rates drop further.
Read more: Fed rate decision: How it affects your bank accounts, loans, credit cards, and investments
A flat yield curve can mean a few different things. A flattened but slightly upward curve can be indicative of weak economic growth. But more often, the curve flattens when there’s a transition from a healthy economy toward a downturn.
When the curve is flat, you can expect to earn roughly the same returns on short-term investments as you can on longer-term options.
So what is the yield curve telling us today? From 2022 to 2024, the yield curve was inverted, and then it reversed, or “uninverted,” in August of 2024. That doesn’t necessarily mean we’re in the clear, since recessions historically begin after these reversals. In fact, some economists are still predicting a recession. As of mid-March, the yield curve is once again inverted, but still well above a 0% spread.
The forecast may be scary, but there are proven strategies for managing your money through these conditions. Here are a few things to keep in mind right now:
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Don’t panic: It’s normal for the economy to fluctuate. Don’t let flashy headlines or fluctuations in your 401(k) balance motivate a knee-jerk reaction, like selling in a panic when your stocks drop in value. When you do, you lock in your losses. Instead, consider your long-term financial strategy before making any big moves.
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Make careful shifts: Don’t throw your whole investment strategy out the window — but do consider shifting your portfolio. For example, you might decrease your U.S. stock holdings while increasing global holdings and Treasurys.
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Lock in short-term rates: If you want to put money in fixed-rate investments, short-term products are likely to be your best bet. T-bonds are up to 4.75% for 20 years (but you can still expect to far outperform them with your retirement account over the long haul). For T-bills, the best rate currently available is for a six-week term (4.32%), although you can find a few CDs with higher rates.
Read more: How to recession-proof your savings