Hawkish comments by Federal Reserve Chairman Jerome Powell helped push a closely watched part of the U.S. Treasury yield curve to its deepest inversion since 1981 on Tuesday, once again putting a spotlight on what many investors consider a time-honored recession signal.
Shorter-dated yields soared, with the rate on the two-year note closing at a new high since mid-2007 at 5.015%. Yields on the 10-year Treasury notes , meanwhile, fell 1.5 basis points to 3.968%.
A steepening curve typically signals expectations for stronger economic activity, higher inflation, and higher interest rates. A flattening curve can mean investors expect near-term rate hikes and are pessimistic about economic growth further ahead.Investors watch parts of the yield curve as recession indicators, primarily the spread between three-month Treasury bills and 10-year notes , and the two- to 10-year segment .That inversion reached negative 103.
The 2/10 year yield curve has inverted six to 24 months before each recession since 1955, according to a 2018 report by researchers at the San Francisco Fed. It offered a false signal just once in that time. That research focused on the part of the curve between one- and 10-year yields. For the last six recessions, a recession on average began six to 36 months after the curve inverted, she said.
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