The US 2/10 Treasury yield curve hit its deepest inversion since the high inflation era of Fed Chairman Paul Volcker, reflecting financial markets' worries over the looming recession.
The yield curve inverts when shorter-dated Treasuries have higher returns than longer-term ones. It suggests that while investors expect interest rates to rise in the near term, they believe that higher borrowing costs will eventually hurt the economy, forcing the Fed to later ease monetary policy.
Yields on two-year Treasuries have been above those of 10-year Treasuries since July 2022. That inversion briefly reached negative 109.50 basis points yesterday as shorter-term yields fell less than longer-dated ones, creating the largest gap between shorter-dated and longer-term yields since 1981. At that time, the economy was in the early months of a recession that would last until November 1982, becoming what was then the worst economic decline since the Great Depression.
The 2/10-year yield curve has inverted six to 24 months before each recession since 1955, a 2018 report by researchers at the San Francisco Fed showed. It offered a false signal just once in that time. That research focused on the part of the curve between one- and 10-year yields.
“It’s not unusual to get a yield curve inversion but it is unusual to get one of this magnitude. We haven’t seen one like this in quite a while,” Brian Jacobsen, senior investment strategist at Allspring Global Investments said to Reuters.