Treasury yield curve does a switcheroo

The yields on two-year and 10-year US Treasuries have inverted – and it could spell a recession. 

Trouble ahead 

Treasury bond yields are an accurate bellwether of the US economy. When times are good, who wants a Treasury bond? But when things start moving in the opposite direction, suddenly safety is the name of the game. 

And when the safest of safe bonds is what investors are after, it normally means gray clouds are gathering over the economy. That’s exactly what happened last week, as yields on two-year and 10-year bonds inverted. According to market intelligence firm Bespoke, this inversion signals “a better than two-thirds chance of a recession at some point in the next year and a greater than 98% chance of a recession at some point in the next two years”. Yikes. 

More than meets the eye? 

But is all as it seems? The last time this inversion happened was 2019, which rolled out the carpet for a recession in 2020. That being said, analysts have been quick to signal caution on the whole “inversion = recession” school of thought. 

The key thing to note here is that inversions need to stay fixed for a while before they become the angel of doom. For instance, if the war in Ukraine ended tomorrow, sanctions were lifted on Russian firms, and everybody started buying oil again, we’d be surprised if investors didn’t gobble up those money bags – forgetting all about their Treasury yields in the process. 

So, while a bond inversion doesn’t mean it’s time to start buying gold just yet, it’s certainly not a good sign.