There has been a lot of talk the past few years about the flattening of the US yield curve—which is a graphical representation of the spread between short- and long-term interest-rate instruments. More recently, some market commentators have focused on the inversion of one part of the curve—and what it means.
As we mentioned in a prior article, when spreads between short- and long-term rates narrow, it typically suggests the market believes economic growth is not sustainable and will fall in the future.
When the spreads between short- and long-term rates turn negative, or invert, it has been seen as a signal a potential US recession may be looming. As the chart below shows, on March 22, the gap between 3-month Treasury bills and 10-year Treasury notes inverted for the first time since 2007.
US Yield Curve as a Recession Indicator
The more widely followed part of the US yield curve is arguably the spread between 10-year and 2-year Treasury notes. As Ed Perks, CIO of Franklin Templeton Multi-Asset Solutions, points out in this article, when that part of the yield curve has inverted in the past, (falls below zero), US recessions have generally followed.