The 2-year/10-year Yield Curve Inverts After 15 Years, Signals Recession

The yield on the benchmark 10-Treasury tumbled 10 points below the 2-year rate, declining to its lowest point in 15 years. The drop comes as investors prepare for the possibility that another aggressive rate hike by the Federal Reserve to curb the 40-year-high inflation could tip the economy into recession.

Yield Curve Most Inverted Since 2007

The yield on the 10-year Treasury note briefly dropped below the 2-year Treasuries for the third time in 2022, an occurrence known as yield curve inversion, which has historically emerged ahead of U.S. recessions.

The curve inverted even though $33 billion of fresh 10-year bonds are set to be sold in an auction in New York today, aimed at increasing the supply and lower prices.

The gap between 2-year and 10-year Treasury notes is one of the most commonly watched spreads. The last time such an inversion happened was in spring 2007, just prior to the 2008 financial crisis.

“Markets are focusing more on the idea that there might be a recession ahead of us. People don’t want to get ahead of the trend even though there’s supply coming.”

NatWest Markets rates strategist Jan Nevruzi.

The inversion deepened as fears among investors about the state of the U.S. economy continue to grow as the Fed maintains its hawkish approach to combating inflation, which remains at its highest level in over 40 years.

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What Does it Mean For the U.S. Economy?

Earlier this week, yields on 2-year Treasuries climbed 2.95%, compared to the 10-year Treasury which stood at 2.94% on that day. In addition, the 2-year/5-year yield curve also inverted for the first time in more than two years.

These inversions indicate that investors could be growing increasingly concerned about the Fed’s ability to tame inflation without jeopardizing economic growth, in spite of claims by policymakers that they are confident in ensuring the “soft landing” for the economy.

The curve inversion has been one of the most reliable recession indicators throughout history. Since 1955, the 2-year/10-year yield curve has inverted ahead of each recession, which usually lasted from 6 to 24 months. The inversion produced a fake recession signal just once during that period.

Commonwealth Financial Network strategist Anu Gaggar said that the 2-year/10-year yield curve has inverted 28 times in the past 122 years. On 22 of these occasions, the economy fell into a recession, Gaggar added.

Do you think the fall of the U.S. economy into recession is inevitable? Let us know in the comments below.