Key Takeaways
- The yield curve righted itself Wednesday after more than two years of a negative spread between the 10- and 2-year Treasury yields. However, the measure inverted again on Thursday.
- An inverted yield curve has historically indicated a recession is on the way.
- The righting of the yield curve could be a positive sign, but some experts said the economy isn’t out of the woods yet.
The yield curve righted itself Wednesday after a long run of inversion for what’s sometimes seen as a recession indicator. The reprieve, however, didn’t last long.
Put another way: The 10-year Treasury yield was briefly higher than the 2-year yield. The spread between the two hasn’t closed above zero since 2022, leaving the yield curve inverted for the longest run in about 60 years.
However, the spread fell back into negative territory shortly after the markets opened Thursday. That reversion, however, remains significant for investors.
Why Do Investors Care About The Yield Curve?
When long-term U.S. Treasury debt earns less interest than its short-term counterpart, that has historically indicated that a recession is on the way.
An inverted yield curve typically indicates some pessimism about the near future of the economy, since investors are understood to generally expect higher yields for longer-term debt as compensation for the later maturity date. (Bond yields move inversely to prices.)
Mike O’Rourke, chief market strategist for JonesTrading, wrote in an analysis that optimism over the Federal Reserve’s plan to cut its benchmark interest rate in September likely spurred the moves.
“The bullish flattening of the yield curve might be considered a positive if the economy or markets had ever been held back by its inversion,” he wrote. “No recession materialized and the S&P 500 rallied 45% over the two years of inversion.”
Some economists said the brief righting of the yield curve isn’t necessarily a positive signal.
“The historic precedent isn’t particularly favourable on this front, as in previous cycles the final stage before the recession was actually a re-steepening of the curve back into positive territory,” wrote Deutsche Bank Strategist Jim Reid on Thursday. “So we have to be cautious in being too optimistic about waving bye to an inversion.”