The possibility of a yield curve inversion, often seen as a precursor to recession, is increasing in the U.S. Treasury market. This comes as short-term Treasury yields rise rapidly in response to expectations of further interest rate hikes by the Federal Reserve, causing the gap between long-term and short-term rates to narrow significantly.
According to Bloomberg on September 28, the spread between the 10-year and 2-year U.S. Treasury yields narrowed to 0.17 percentage points (17 basis points) last week, the smallest gap since early 2025. Currently, the yields on 2-year and 10-year Treasuries are approximately 4.9% and 5.2%, respectively.
A narrowing yield gap is referred to as 'yield curve flattening.' If the gap continues to close and the 10-year yield falls below the 2-year yield, a 'yield curve inversion' occurs, which has historically been viewed as a signal of an impending recession.
The Fed's recent interest rate hike, the first in three years, and indications of potential further increases have led to a quicker rise in the 2-year Treasury yield compared to the 10-year yield. The market anticipates at least three more rate hikes of 0.25 percentage points each over the next year.
While strong growth and inflation concerns have previously pushed Treasury yields higher, the Fed's hawkish policies have led the market to begin worrying that these rate hikes could ultimately result in economic slowdown.
Jack Griffiths, head of macro strategy at Credit Suisse, told Bloomberg, "The inversion or rapid flattening of the 2-year and 10-year yield curve raises questions about the prevailing perception of a very strong economy. This change is being reflected in bond market pricing."
There are also predictions that the yield curve could invert within the next six months. Ed Alhussaini, a portfolio manager at Columbia Threadneedle Investments, stated that they are preparing for the possibility of inversions in the yield curves of 2-year and 10-year, as well as 5-year and 30-year Treasuries, within the next six months. He explained, "The best signal that monetary policy is tightening is when the yield curve flattens and eventually inverts."
According to Bloomberg, since 1978, the average time from when the 2-year and 10-year Treasury yields inverted to the onset of a recession has been about 15 months.
However, there are growing doubts about the predictive power of yield curve inversions for recessions. In fact, this indicator has not accurately predicted recessions in the 2020s. The yield curve inverted in 2022, yet the U.S. economy did not enter a recession.
Currently, some argue that the U.S. economy is far from recession. In a Bloomberg survey conducted in August, economists raised their forecast for U.S. economic growth in the third quarter from 2% to 2.5%, reflecting strong demand.
* This article has been translated by AI.
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