The U.S. Treasury yield curve inverted for the first time since June 2007, in a sign of investor concern that the world's biggest economy could be heading for recession
The spread between yields on U.S. two-year and 10-year notes, a closely watched metric, is likely to invert for the first time since 2007. That would follow the inversion of another part of the yield curve earlier in the year. Here is what that means.
When yields further out on the curve are substantially higher than those near the front, the curve is referred to as steep. So a 30-year bond will deliver a much higher yield than a two-year note. In March, inversion of the yield curve hit 3-month T-bills for the first time in about 12 years when the yield on 10-year notes dropped below those for 3-month securities. That metric reverted back and then inverted again in May and is now trading at negative 36 basis points.
When short-term yields climb above longer-dated ones, it signals short-term borrowing costs are more expensive than longer-term loan costs. That said, the yield curve between three-month bills and 10-year notes has become an increasingly popular indicator of future weakness since the Federal Reserve identified it as a more accurate recession indicator than other parts of the curve.
So, when the Fed is raising rates, as it did for three years, that pushes up yields on shorter-dated bonds at the front of the curve. And when future inflation is seen as contained, as it is now because higher borrowing costs are expected to become a drag on the economy, investors are willing to accept relatively modest yields on long-dated bonds at the back end of the curve.
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