Does the yield curve often "improve" (un-invert) before a market crash?

Yes — historically, the yield curve tends to steepen (or normalize) shortly before recessions or market downturns hit. That can seem counterintuitive because most people associate an inverted yield curve with recession signals (which is true). But here’s the nuance:

 

How this typically works:

1. Inversion phase

   • Short-term rates rise above long-term rates as central banks hike rates to fight inflation or cool an overheating economy.

   • This inversion is historically one of the most reliable recession indicators — often leading a downturn by 12-24 months.

2. Normalization/steepening phase

   • The curve often starts to steepen again when markets anticipate central banks will soon cut rates (usually because the economy is weakening).

   • Short-term yields drop faster than long-term yields, and the curve re-steepens.

   • This shift has historically happened right before, or during the onset of recessions or market corrections.

3. Market crash or economic downturn

   • The actual recession or sharp market drop frequently occurs after the curve has started to normalize.

   • Why? Because while bond markets see trouble ahead and anticipate rate cuts, equity markets and economic data often take longer to reflect that deterioration.

 

Example — 2000, 2008, and 2020

• 2000 Tech Bust: Yield curve inverted in 1999, steepened in early 2000 as rate cuts began, then the market tanked.

• 2008 GFC: Inverted in 2006-2007, began steepening in late 2007, crisis hit late 2008.

• COVID 2020: Curve inverted briefly in 2019, normalized early 2020 before pandemic-triggered crash.

 

What it signals

When the curve starts to "improve" after a long inversion — it’s not always a bullish sign. It often means:

• The market expects rate cuts.

• Bond investors foresee economic weakness ahead.

• Stocks might still be vulnerable because earnings, employment, and other lagging indicators haven’t caught up yet.

 

Right now (2025 )

Both the U.S. and Australian curves have recently re-steepened after historic inversions. Historically, this is the phase where you stay cautious — because while the inversion signal has passed, the actual economic slowdown or market volatility often follows soon after.

​