Treasury Yield Curve Reaches Steepest Inversion in 40 Years

The inversion between the 10-year and two-year Treasury yields widened further

Fed Chair Jerome Powell
Chip Somodevilla / Staff / Getty Images.

Federal Reserve Chair Jerome Powell will discuss the economy, inflation, and interest rates at an event in Washington, D.C. today. Many investors will also be looking to see whether he will address the possibility of a recession, especially given the Treasury yield curve recorded its deepest inversion in over four decades.

An inverted yield curve is often seen as a warning that a recession is looming. Longer-term yields are usually higher than shorter-term yields because investors want to guard against the risk of unexpected inflation and rate increases. 

The yield on the 10-year Treasury note dropped to 0.78 percentage points below the two-year yield, the largest negative gap since 1981, before easing slightly. The inversion reflects both surprising positive news on inflation as well as the view that the Federal Reserve will continue to raise interest rates and keep them at elevated levels.

Yesterday, the Conference Board’s Consumer Confidence Index slipped to a four-month low, as concerns about inflation soured U.S. consumers' outlooks. Lynn Franco, the Conference Board’s director of economic indicators, called consumers’ short-term expectations “gloomy,” and added that the survey suggests they feel the likelihood of a recession remains elevated.

10/2-Year Treasury Yield Spread
YCharts.
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