The yield curve is a closely watched market indicator. When it inverts, meaning short-term interest rates are higher than long-term rates, it’s often seen as a sign that a recession is on the horizon.
But, a disinversion – when the yield on a 10-year Treasury note exceeds that of a 2-year note – can actually be even more alarming. This kind of shift indicates that traders are reassessing the need for rate cuts, suggesting they see weaker economic conditions ahead.
That’s why the recent disinversion of the 2s10s yield curve has caught some attention. It happened following weak payroll numbers and the triggering of the Sahm rule, which identifies a recession when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more from its low during the previous 12 months. The result: a significant rally in two-year Treasuries, reflecting expectations for lower short-term rates.
Things are moving in the opposite direction in Japan, where their central bank is now hiking rates for the first time in 17 years to calm the recent uptick in inflation and to help normalize a strong economy.
Here at home, the disinversion of the yield curve is another volatility signal to watch, suggesting that the economic outlook is shifting and future rate cuts might not live up to expectations.
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