A closely watched recession signal flashed red on Tuesday, as investors fretted that the Federal Reserve’s efforts to tame inflation will bring about a sharp slowdown in US economic activity.
Two-year Treasury note yields rose above those of the 10-year for the first time since August 2019, inverting a portion of the yield curve monitored closely by Wall Street and policymakers. Inversions typically signal malaise about the economy’s long-term growth prospects and have preceded every US recession in the past 50 years.
Typically, a recession has followed in the two years after an inversion of this measure of the yield curve.
Two-year yields, which move with interest rate expectations, rose as high as 2.45 percent, the highest level since March 2019. The two-year yield has risen by 1.64 percentage points this year as the US central bank has tightened monetary policy, including its first rate rise since 2018 in order to combat inflation that’s at a 40-year high.
The 10-year yield, which moves with inflation and growth expectations, fell as low as 2.38 per cent. The benchmark yield has also risen this year, albeit at a slower pace, as tighter Fed policy has curtailed inflation and growth forecasts.
After inverting, the gap quickly widened and the yield curve turned positive again, where it hovered at about 0.02 percentage points. At the start of the year, it stood at 0.77 percentage points.
The US yield curve inverts for the first time since 2019