On December 14, 2010, a trader issued a quote signal on the S&P 500 stock index futures trading floor of the CME Group in Chicago.
Scott Olson | Getty Images News | Getty Images
The relationship between 10-year and 2-year Treasury yields briefly normalized on Wednesday, reversing classic recession indicators.
The benchmark index fell after economic news showed a sharp decline in job openings and dovish comments from Atlanta Fed President Raphael Bostic The 10-year bond yield is slightly higher than the 2-year bond yield For the first time since June 2022.
The yields on that day were all about 3.79%, with a difference of only a few thousandths of a percentage point.
10-year return versus 2-year return
An inverted yield curve (i.e., higher recent yields) has been a signal of most recessions since World War II. The reason why short-term yields are higher than long-term yields is essentially the result of traders pricing in slower growth in the future.
However, the normalization of the curve does not necessarily herald better times ahead. The fact that the curve typically recovers before a recession hits means the U.S. may still face some tough economic troubles ahead.
“If you don’t have any sense of history about the economy, it goes without saying that this is going to be positive,” said Quincy Krosby, chief global strategist at LPL Financial. “Statistically, however, when the economy does tank In a recession, or simply because the Fed is going to cut interest rates, the yield curve will normalize in response to the economic slowdown.
The Labor Department reported that job openings unexpectedly fell below 7.7 million this month, leaving supply and demand almost flat since the COVID-19 crisis. Job vacancies once outnumbered the labor supply by more than 2 to 1, exacerbating the highest level of inflation in more than 40 years.
Meanwhile, Atlanta Fed President Raphael Bostic made comments around the same time the job openings report fell, suggesting he was ready to start even if inflation was above the central bank’s 2% target. Cut interest rates.
Lower interest rates are seen as a driving force for economic growth; the Federal Reserve will maintain the benchmark interest rate at the highest level in 23 years since July 2023, with a target range of 5.25%-5.5%.
While the market is most closely watching the relationship between the 2-year and 10-year notes, the Fed is paying closer attention to the relationship between the 3-month note and the 10-year note. This part of the curve is still sharply inverted, with the current difference exceeding 1.3 percentage points.
About The Author
