Bond Market ‘Yield Curve’ Returns to Normal from Inverted State that Raised Recession Fears

• The relationship between the 10-year and 2-year Treasury yields briefly normalised Wednesday, reversing a classic recession indicator. Following economic news that showed a sharp decline in job openings and dovish remarks from Atlanta Fed President Raphael Bostic, the benchmark 10-year yield inched above the 2-year for the first time since June 2022.
• The respective yields were both around 3.79% on the session, with just a few thousandths of a percentage point (pp) separating them. An inverted yield curve, where short-term yields are higher than long-term yields, has signalled the most recessions since World War II.
• The reason why shorter-duration yields rose above their longer-duration counterparts is essentially the result of traders pricing in slower growth out into the future. However, a normalization of the curve does not necessarily signal good times ahead. In fact, the curve usually does revert before a recession hits, meaning the U.S. could still be in for some rough economic waters ahead.
• While the market most closely watches the relationship between the 2-year and 10-year yields, the Fed more closely observes the relationship between the 3-month and 10-year. That part of the curve is still steeply inverted, with the difference now at more than 1.3pp.

(Source: CNBC)