The yield curve was mostly inverted during 2023 and most of 2024. It has been slowly normalizing over 2025. This means that short-term yields are lower than long-term yields once again, which is the “normal” state of nature.
An inverted yield curve doesn’t make much sense. Why would someone lend money for 30 years with a lower interest rate than what they would get for lending it out for just 3 months? Why lock up your money for 30 years when you can get a higher average annual return and get your money back after 3 months? After all, you can reinvest the money after 3 months.
The only reason to do such a thing is on the belief that rates will be even lower in the future. You might lock in a rate for 30 years if you thought rates were going lower in the future.
This is not normal. In a world without fiat money and central banking, it is unlikely we would see this drastic inversion.
Yields in December 2025
As I write this, the yield on a 3-month treasury is lower than both the 10-year yield and 30-year yield. It isn’t by a lot. It is about a 34 basis point difference between the 3-month and 10-year yield. It is about 100 basis points (1%) between the 3-month yield and 30-year yield.
If the Fed cuts its target rate by another 25 basis points in December, then the spread on the yields should widen. The short-term yields should continue to fall.
This is significant, even though hardly anyone is talking about it. The yield curve was inverted for about 2 years. At times, it was quite heavily inverted. It has been somewhat flat for the last year. It is finally normalizing, especially with the Fed rate cuts.
The yield curve has historically been a good predictor of recessions. But the recession doesn’t come when the yield curve is inverted. It comes after the yield curve was inverted and then normalizes.
If history is any guide, we should be in for a hard recession any time now.
The Fed’s Actions
The big variable is the actions of the Federal Reserve. There should have been a recession in 2020 with or without COVID lockdowns. But the government lockdowns provided an excuse for Congress to spend trillions of dollars extra and for the Fed to more than double the money supply in 2 years. Most of that doubling happened in March to May 2020.
When you inject such a ridiculous amount of money, both through government spending and monetary inflation, it is understandable how the recession barely happened at that time.
It’s always possible the same could happen again here. It doesn’t necessarily have to be a virus and lockdowns as the excuse.
Still, with consumer price inflation still above 2%, it is hard to imagine the Fed going crazy again with monetary inflation. The Fed will likely return to monetary inflation when there is some kind of banking crisis, trouble in the bond market, or a massive stock market crash. But at that point, the recession is already here. Some of the damage will already have been done, and the Fed’s interventions will likely only make things worse in the long run.
I don’t think the Fed is going to go crazy like 2020 just because stocks take a dive or because Bitcoin is crashing. If there is a banking crisis, then maybe we will see something like that.
The point is that you shouldn’t count on the Fed to bail out your portfolio. Remember the tech crash of 2000 to 2002. Remember the financial crisis of 2008. There were dramatic drops in the market. The Fed’s interventions took a while to save the day.
The Fed’s actions will, unfortunately, continue to play a big role in the economy. This doesn’t mean that your investments are safe in the stock market or Bitcoin or anything else. The Fed will do whatever it takes to save the big banks. It won’t do whatever it takes to save your retirement portfolio.