The Hidden Signal That Predicted
Every Recession Since 1950

One of the simplest recession “signals” is also one of the most watched in global markets: the yield curve. In the US, research used by the Federal Reserve Bank of New York shows the yield curve has predicted essentially every recession since 1950 with only one notable “false” signal. For UK borrowers, this matters because swap rates and gilt yields feed directly into how lenders price fixed-rate mortgages.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

What The “Hidden Signal” Actually Is

The yield curve is the relationship between interest rates on short-term borrowing and long-term borrowing. Normally, longer-term rates are higher because investors want extra return for tying money up for longer.

The “signal” is when that relationship flips (an inversion) or becomes unusually flat. In the US, a commonly used measure is the spread between the 10-year government bond yield and the 3-month Treasury bill yield, which the New York Fed uses in a model to estimate the probability of a recession 12 months ahead.

Why would this ever happen? In broad terms:

• Short-term rates rise when central banks set policy rates high to control inflation.

• Long-term rates can fall (or rise less) if investors expect weaker growth and lower inflation ahead.

• When markets expect future rate cuts, longer-term yields can drop below short-term yields, producing an inversion.

It is not a guarantee of recession. It is a historically reliable warning sign that financial conditions may be tight enough to slow the economy, and that markets expect lower rates in future.

Why It Worked For So Long (And Why It Can Still Mislead)

The New York Fed’s yield-curve explainer notes the curve has “predicted essentially every U.S. recession since 1950” with one false signal linked to the 1967 credit crunch/slowdown period. The Federal Reserve has also published research explaining how the slope of the yield curve can be used to estimate recession probabilities, while highlighting that models differ and should be read alongside other indicators.

Still, there are reasons the signal can be less clean than headlines suggest:

• Central bank bond-buying programmes (quantitative easing) can push down long-term yields, potentially flattening curves without the same growth message.

• Global demand for “safe” government bonds can compress long-term yields.

• The timing varies. Even when the signal is right, recessions can arrive many months later.

So, a useful way to treat it is: a curve that is flattening or inverted is a sign that markets think policy is restrictive relative to future growth — not a countdown clock.

Bank Of England Policy And Why UK Mortgages Care

In the UK, Bank Rate is the anchor for a large part of the money market. On 18 December 2025, the Bank of England cut Bank Rate by 0.25 percentage points to 3.75%.

For mortgage pricing, two channels matter most:

• Tracker and variable rates often move more directly with Bank Rate (though lenders’ decisions can differ by product and timing).

• Fixed-rate mortgages are heavily influenced by wholesale funding costs and interest rate expectations, commonly reflected in SONIA swap rates and gilt yields, not just today’s Bank Rate.

The Bank of England publishes daily estimated yield curves for both gilt-based yields and sterling overnight index swap (OIS) rates linked to SONIA, underlining how central these markets are to UK interest-rate expectations.

What The UK Curve Is Saying Right Now

A practical way to “translate” the yield-curve idea into a UK lens is to look at the gap between shorter-dated and longer-dated gilt yields and the shape of SONIA/OIS curves.

As of 18 December 2025, widely tracked market data showed:

• UK 2-year gilt yields around the mid-3% range

• UK 10-year gilt yields around the mid-4% range

That shape is not inverted on those points (longer yields above shorter yields). In plain terms, that can be consistent with markets expecting rate cuts to continue gradually, but not expecting a near-term collapse in longer-term rates.

However, the curve can shift quickly around inflation surprises, jobs data, and central bank messaging. The Bank of England’s own “latest decision” guidance explicitly says future moves depend on whether things like pay growth and services inflation continue to ease.

What This Could Mean For Fixed Mortgage Rates In 2026

Fixed mortgage pricing tends to reflect where markets think SONIA and Bank Rate will average over the fixed period, plus lenders’ funding costs, risk appetite, and competitive pressures.

Recent market commentary in the consumer finance press has highlighted that fixed mortgage pricing has been easing through 2025, as expectations for rate cuts built in. For example, Moneyfacts data shows average two-year and five-year fixed rates fell across 2025 (figures referenced below), while also noting that product pricing can change quickly and is subject to eligibility and affordability checks.

If the yield curve (and swap curve) were to flatten sharply again, it could indicate markets are pricing in weaker growth and faster future rate cuts — a setup that can reduce swap rates and support lower fixed-rate pricing. Equally, if inflation proves sticky and markets re-price Bank Rate higher for longer, swap rates can rise and fixed-rate pricing can harden even if the Bank has already started cutting.

For borrowers, the key point is that mortgage pricing responds to expectations, not only to what the Bank does on a single meeting date.

Key Numbers To Watch

• Bank of England Bank Rate: 3.75% (decision published 18 December 2025)

• UK 2-year government bond yield: 3.74% (18 December 2025)

• UK 10-year government bond yield: 4.49% (18 December 2025)

• Average two-year fixed mortgage rate: 4.86% (as of 1 December 2025)

• Average five-year fixed mortgage rate: 4.91% (as of 1 December 2025)

• Lowest headline mortgage rates “below 3.80%” reported in early December 2025 (product availability and eligibility vary)

Figures as of 19 December 2025 London

What This Could Mean For First-Time Buyers, Remortgagers, And Buy-To-Let

First-time buyers
A falling-rate environment can improve affordability at the margin, but lenders still assess affordability using their own stress tests and criteria. Even if fixed rates drift down, deposit size, credit history, and household outgoings remain central. The yield curve is best read as a background signal for where pricing pressure may head, not as a guide to timing a purchase.

Remortgagers
If your fixed rate ends in 2026, the mortgage you move to may be shaped more by where swap rates sit at the time you secure a product than by where Bank Rate is on that day. The curve matters because it reflects those market expectations. Moneyfacts has also noted a large volume of fixed-rate expiries due in 2026, which can keep competition active, but pricing can still move quickly.

Buy-to-let landlords
Buy-to-let pricing is influenced by many of the same wholesale rates, but lender stress tests and rental-coverage requirements can be as important as the headline rate. If the curve steepens (longer rates rising relative to shorter rates), longer fixed deals may not fall as quickly as shorter ones, changing the trade-offs between payment certainty and rate level.

The information provided in this article is for general guidance only and does not constitute personal or regulated financial advice. If you’d like to understand what these moves could mean for you, speak to Mortgage One, we can explain your options and timings based on your specific circumstances.

Some Buy to Let mortgages are not regulated by the Financial Conduct Authority.

FAQs

1) What is the yield curve recession signal?
It’s the relationship between short-term and long-term government interest rates. When the curve becomes very flat or inverts, it has historically been associated with a higher risk of recession.

2) Which yield curve measure is most cited for predicting recessions since 1950?
In the US, research referenced by the Federal Reserve Bank of New York often focuses on the spread between the 10-year government bond yield and the 3-month bill yield.

3) Does an inverted yield curve guarantee a recession?
No. It has been a historically reliable warning sign, but it can produce false signals and the timing can vary widely.

4) Why does the yield curve matter for UK fixed-rate mortgages?
Because UK fixed mortgage pricing is influenced by wholesale funding costs and market expectations, often reflected in SONIA swap rates and gilt yields.

5) If Bank Rate falls, will fixed mortgage rates definitely fall too?
Not necessarily. Fixed rates often move on expectations of future Bank Rate and market pricing. They can rise or fall even when Bank Rate is unchanged.

6) What should I watch if I’m remortgaging in 2026?
Watch Bank of England messaging, SONIA swap-rate expectations, and broader inflation and employment data that can shift market pricing.

7) Are tracker mortgages affected differently from fixed mortgages?
Often yes. Trackers commonly move more directly with Bank Rate changes, while fixed rates are more sensitive to swap rates and expectations.