This classic recession indicator just hit its lowest level since 1981—here’s what it means for you

Everyday investors likely don’t pay too much attention to the so-called “yield curve,” which financial professionals use to compare the yields on similar bonds across short- and long-term maturities.

So when the yield curve does make headlines, it’s generally because it’s setting off some alarm bells among market watchers.

It’s been a year since the yield curve for Treasurys “inverted.” In general terms, that means short-term bonds are paying higher interest rates than long-term bonds. Earlier this week, the disparity between two bonds in particular was the largest investors had seen since 1981.

Essentially, the curve had been inverted, and now it’s even more so.

So what’s the big deal? An inverted yield curve is a classic signal that a recession is on the horizon.

“In fact, since 1978, the yield curve has inverted six times (not counting the current inversion period) and has preceded a recession each time,” Megan Horneman, chief investment officer at Verdence Capital Advisors, wrote in a recent note.

Here’s what you need to know this time around.

The yield curve is an easy, graphic way to understand the difference between yields on a particular type of bond across various maturities. Under normal economic circumstances, the curve trends upward: short-term bonds provide less income to investors because holding an investment for a shorter time involves less risk.

A downward-tending or “inverted” yield curve means that you earn less on securities that you plan to hold for longer, and is a sign that something in the economy is amiss.

When you’re reading about the yield curve, it almost always refers to rates paid by short- and long-term U.S. Treasurys. Different market analysts like to use bonds of different maturities as proxies for a short-term and long-term bond, but by far the most popular are the 2-year and 10-year treasury.

Two-year government bonds have been…