The policy rate is set by a committee. Every other rate in the economy is set by markets, anchored to expectations about that policy rate over time. Conflating the two is the most common source of confusion in macro commentary.
| Policy rate | 2Y yield | 10Y yield | |
|---|---|---|---|
| Set by | Central bank committee | Market | Market |
| Reflects | Current policy stance | Expected average policy over ~2 years | Expected policy, growth, inflation and term premium |
| Changes | On scheduled meeting dates | Continuously | Continuously |
| Most useful for | Knowing what has been decided | Reading what the market expects next | Reading longer-run growth and inflation expectations |
yield ≈ annual coupon / price
A bond paying $5 a year bought at $100 yields 5%. If its price falls to $80, the same $5 is a 6.25% yield. Real bond maths accounts for maturity and reinvestment, but the inverse relationship is exactly this.
The yield curve plots yield against maturity. Normally longer maturities yield more, compensating for the additional uncertainty of lending for longer. When short yields exceed long yields the curve is inverted, which historically has often preceded recessions — though the lead time has varied enormously and there have been false signals.
Common belief
"An inverted yield curve means a recession is coming."
What is actually true
Inversion has preceded most recent recessions, but the lag has ranged from months to over two years, and there have been inversions without recession. It is a signal worth weighting, not a trigger. VILIQ treats the 10Y–2Y spread as one factor among many, not as a standalone call.
The policy rate is 4.35% and the 2Y yield is 3.60%. The market is pricing meaningful cuts over the next two years. If the 2Y then rises to 4.20% without any policy meeting occurring, expectations have shifted — the market now expects fewer cuts. Nothing was announced; the expectation changed.
This is why the VILIQ regime engine uses the policy rate, the 2Y yield and the real 10Y yield as separate inputs rather than a single "rates" number. They answer different questions, and periods where they diverge are exactly the periods worth noticing.