Yield Curve Uninverts

Key Takeaways

• The spread between 2-year and 10-year yields went positive for the first time since mid-2022.
• An inverted yield curve has signaled most recessions since WWII.
• Experts caution that the curve could invert again.

Yield Curve Briefly Normalizes

On Wednesday, the yield curve between the 10-year and 2-year Treasury briefly normalized, signaling a reversal of the classic recession indicator. This shift followed economic data showing a sharp drop in job openings and dovish comments from Atlanta Fed President Raphael Bostic. The yields for both the 10-year and 2-year Treasury were near 3.79%, marking the first time since June 2022 that the 10-year yield moved slightly above the 2-year.

What Is The Yield Curve?

The yield curve is a widely recognized predictor of recessions, with an inverted curve often signaling future economic downturns. When the yield curve inverts, short-term borrowing costs rise while long-term yields fall, reflecting expectations of weaker growth and inflation. Conversely, a steep yield curve suggests lower short-term borrowing costs and optimism about future growth.

Key Signal To Watch

A key signal to watch is when the yield curve dis-inverts after a prolonged inversion, as this has historically preceded economic slowdowns. Currently, the U.S. yield curve has been inverted for 27 months and is now beginning to dis-invert while signs of a slowing job market are emerging. Although macroeconomic lags in this cycle have been unusually long due to structural factors like fixed-rate mortgages, the delayed effects of higher rates are expected to impact the economy soon.