A trader signals a sell in the Standard & Poor’s 500 stock index futures trading pit at the CME Group in Chicago on December 14, 2010.
Scott Olson | Getty Images News | Getty Images
The relationship between 10-year and two-year Treasury yields briefly normalized on Wednesday, reversing a classic recession indicator.
The benchmark rally came amid economic news showing a sharp decline in job openings and dovish comments from Atlanta Fed President Raphael Bostic. The 10-year yield was slightly higher than the 2-year yield. This is the first time since June 2022.
Their respective yields were around 3.79% during the session, with the difference between the two being just a few thousandths of a percentage point.
10-year and 2-year bond yields
An inverted yield curve, or a curve where shorter-term interest rates are higher, has been the sign of most economic downturns since World War II. Short-term rates exceed longer-term rates because traders are essentially pricing in slower growth in the future.
But a normalizing curve isn’t necessarily a sign of better times to come — in fact, the curve usually normalizes before a recession hits, meaning the U.S. could still be facing tough economic times ahead.
“If you know absolutely no economic history, that’s obviously a positive,” said Quincy Krosby, chief global strategist at LPL Financial Inc. “But statistically, if the economy actually goes into or is in a recession, the yield curve will normalize simply because the Fed will cut interest rates in response to an economic slowdown.”
The Labor Department reported that job openings unexpectedly fell below 7.7 million in July, bringing supply and demand closer to parity after a severe imbalance since the coronavirus crisis. Job openings were at one point more than double the labor supply, exacerbating inflation that was at its highest in more than 40 years.
Meanwhile, in comments made around the same time as the jobs data was released, Atlanta Federal Reserve Bank President Raphael Bostic suggested he was ready to start cutting interest rates even as inflation remains above the central bank’s 2% target.
Lower interest rates are expected to boost economic growth, and the Fed has kept its policy rate at its highest level in 23 years since July 2021, with its target rate in the range of 5.25% to 5.5%.
While the market pays most attention to the relationship between the two-year and 10-year Treasury notes, the Fed is watching more closely the relationship between the three-month and 10-year notes, whose yield curve remains sharply inverted and whose spread is now more than 1.3 percentage points.
