As risk-off sentiment swept the globe on Wednesday and handed U.S. stocks their worst day since late 2022, the bond market was acting in a rather strange way.
Shorter-term U.S. government debt rallied, sending the policy-sensitive 2-year yield to its lowest level in more than five months or almost 4.42%. Meanwhile, long-term Treasurys sold off, pushing the 10-year benchmark yield to a two-week high of nearly 4.29%. The result was a narrowing difference or spread between the two yields that left this part of the Treasury curve at its least-inverted level since July 12, 2022, or minus 13 basis points.
Ordinarily, the 10-year yield
TMUBMUSD10Y
4.247%
trades above its 2-year counterpart
TMUBMUSD02Y
4.441%
when traders assume brighter U.S. economic growth prospects ahead, leaving the so-called 2s10s spread as positive.
Instead, the spread has been inverted or below zero for two full years as higher interest rates from the Federal Reserve’s inflation fight took hold, raising expectations for an eventual U.S. economic downturn. Though it can take up to two years for a contraction to emerge after this part of the Treasury curve starts to inverts, a recession still has yet to materialize.
Conventional wisdom is that the 2s10s curve becomes less inverted, as it did on Wednesday, as a recession actually draws near.
But the next-day analysis of what happened in Treasury-market trading on Wednesday now includes some analysts’ doubts that a less-inverted 2s10s spread automatically means a recession is moving closer. That’s because it is equally possible that the Fed might be able to lower interest rates by enough to secure a soft landing and help the world’s largest economy dodge a downturn.
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