"I think what the yield curve is telling you is that we are in for a period of slow growth," said Hamish Pepper, fixed income and currency strategist at Harbour Asset Management.
"Maybe it's a recession, but even if it is, it is unlikely to be a deep one," Pepper said.
"It's not likely to be the kind of recession that people think of post the global financial crisis, for example.
"The yield curve is telling you that growth is going to be slower in the future and inflation is going to be lower than it is today."
There's a growing sense in the financial markets that inflation, which hit 7.3 per cent in the June year, may have peaked.
The Reserve Bank this month raised its official cash rate by 50 basis points to 3.0 per and pencilled in two more half-point hikes - one in October and the other in November.
Kiwibank chief economist Jarrod Kerr said the outlook for inflation has improved.
Shipping costs - and delivery times - are falling and commodity prices are being revised lower with weakening growth, he said.
Kerr said we may have seen the peak in interest rates.
"Will the signal of the inverted yield curve prove correct? It is highly probable. One thing is certain – it is going to be a bumpy road ahead," Kerr said.
Bank of New Zealand senior economist Doug Steel said flat or negative yield curves had become commonplace around the world.
Like Pepper, he said if a recession did occur, market pricing suggested it would be a mild one.
Steel said not too much could be read into the shape of the local swaps curve as a possible harbinger of recession.
"A it's mild and B it's not the best indicator of a recession in New Zealand," he said.
Conversely, in the US an inverted curve was a good indicator a recession was on the way.
"But in New Zealand's case, we are a small, open economy and our rates can get moved around by many things - including events offshore."
Steel said a cooling housing market and a decline in construction suggested the economy may experience a mild recession next year, if not before.
But Steel said any future downturn was likely to be a "sinking lid" rather than a shock collapse.
"If you look at labour market strength, our balance sheets are a lot better than they have been going into other recessions, if in fact we are going into one.
"It's like a sinking lid, rather than a shock collapse, which often is what the previous other recessions have been.
"If you judge just the pricing, then it suggests that the slowdown-recession will be mild and orderly," Steel said.
"As each minute ticks past, the market will reassess that."
ANZ strategist David Croy said it can be "tricky" to infer a reliable signal from the New Zealand yield curve.
"That's because the short end tends to dance to a domestic beat, and is driven primarily by the evolution of OCR expectations, whereas the long end tends to dance to a global beat, and at times, the local and global vibes have a very different feel to them," he said.
"At the moment, recession fears are definitely percolating through interest rate markets, but so too are inflation fears, and that's contributing to slightly odd - but not unprecedented - spoon-shaped curve.
"But oftentimes, the shape of the curve simply reflects two different vibes as the market tries to join the dots between what's going on locally and what's going on globally," he said.
Croy said an inverted New Zealand yield curve isn't always a harbinger of recession.
During the last prolonged period when it was inverted – for over three years from the beginning of 2005 till the middle of 2008 – the New Zealand economy boomed.
"The curve was only inverted because the Reserve Bank was tightening, but global interest rates were more stable, and that kept long end interest rates here in check," Croy said.
