New York, Sept. 28 (SANA) The closely watched gap between two-year and 10-year U.S. Treasury yields is moving closer to inversion, a development historically associated with economic slowdowns, as investors bet on further Federal Reserve rate hikes, Bloomberg reported Monday.
The gap narrowed to 17 basis points last week, its smallest since early 2025, as short-term yields rose faster than longer-term rates.
An inversion occurs when short-term government debt yields more than longer-term bonds. Investors monitor the phenomenon because it has often preceded U.S. recessions, although it does not guarantee an economic downturn.
The move comes after the Federal Reserve raised interest rates this month for the first time in three years as policymakers seek to contain inflation amid elevated energy prices.
Traders are pricing in at least three additional quarter-point rate increases over the next year, with a fourth also possible, according to Bloomberg.
The two-year Treasury yield is about 4.9 percent, while the 10-year yield is around 5.2 percent, near its highest level since 2007.
Higher interest rates can help curb inflation by slowing demand, but keeping borrowing costs elevated for longer can also weigh on economic growth.
Zachary Griffiths, head of investment-grade and macro strategy at CreditSights, told Bloomberg that the prospect of the two-year/10-year curve inverting or flattening sharply was challenging the view that the U.S. economy remained “very strong.”
Historically, inversions of the two-year/10-year curve have preceded U.S. recessions by an average of about 15 months since 1978, Bloomberg data showed, though the interval has ranged from six months to two years.
The signal has not always proved reliable. Several U.S. yield curves inverted in 2022 amid widespread recession forecasts, but the economy continued to expand through the Federal Reserve’s 2022-23 tightening cycle.
Recent economic data offer a more mixed picture. Economists raised their third-quarter U.S. growth estimates in Bloomberg’s latest monthly survey, citing resilient demand.
A flatter yield curve could also put pressure on banks, which typically borrow short-term and lend long-term. The KBW Bank Index has fallen 10 percent from recent highs and entered correction territory last week.
The shift marks a reversal from the beginning of the year, when investors expected interest rate cuts and lower short-term Treasury yields. Markets are now pricing in tighter monetary policy as inflation and energy costs remain elevated.
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