How does An Inverted Yield Curve Imply Recession?

An inverted yield curve happens when yields of long-term bonds are higher than those of the short ones. it's called "inverted" because normally short-term bonds have higher yields.

Why Short Term Bonds Should Have Higher Yields? 

Freedom

Short-term bonds holder have more freedom than those holding long ones, because the formers' bonds reach maturity sooner, they therefore get cash sooner.

On the other hand, long-term bond holders enjoy less with being able to use cash in a short term, and therefore should get better returns.

Duration

Duration measures how much a bond is sensitive to interest rate changes, and bonds with longer maturity have higher duration(more sensitive) than ones with shorter maturity.

An example of bonds with a face value of $100 and a coupon rate of 5% is as below:

Bond	Maturity	interest rate	Spot Price
A	1 year	1%	$103.96
		2%	$102.94
B	2 years	1%	$107.88
		2%	$105.82

The price of bond B move more than the one of bond A.

How are Bond Yields and Economic Growth Related?

bond yields have two perspectives, the one with buyers and the other with sellers.

Bond Buyers' Perspective

For bond buyers' perspective, they want greater returns with longer maturity bonds. One reason is that they can just reinvest in short-term bonds if short term bonds have better yields, and if their money is locked in with longer maturity bonds, they should ask for better returns.

Bond Sellers' Perspective

Bond sellers can be companies looking for cash. If companies want cash and don't want to give back the borrowed principal amount in a short term, they should sell longer maturity bonds, since within those periods companies with normal operations should make enough money to pay back the principal amount.

The more time companies have to return the principal amount, the less stressed they feel,

Therefore, companies borrowing money wanting to return the principal amount late should pay more on the interests(coupons).

How does An Inverted Yield Curve Imply Rescission?

Bond Buyers' Perspective

If bond buyers rather invest in longer maturity bonds with less yields than the short ones with greater yields, they are expecting interest rate would gradually dropping, because otherwise they would just reinvest in short term ones.

They are not looking forward to good stock market returns, either, because in the long run,  stock market returns should be more appealing than bonds. But now, inverters just want lower yield long-term bonds.

This means bond buyers are not expecting long-term economic growth.

Bond Sellers' Perspective

If bond sellers rather sell short-term bonds with lower rates, they don't want to owe money too long. They want cash in the longer future. If economy is expanding, they should keep borrowing money(selling bonds) and invest in research and development, human capital, production or anything that could help them grow.

But now they don't want to borrow in longer terms, they want to borrow in short terms even if it costs more.

The bond sellers are not expecting long-term economic growth. And that companies actually are not borrowing money to try to grow their businesses can cause recession.

Conclusion

When both money lenders and borrowers are not confident enough that the economy will grow as they expect, and borrow or lend money with higher rates and with shorter terms, their actions could imply or actually cause recession in the future.