The bond market is getting closer to sounding alarm on economy
The extra yield investors demand to hold 10-year Treasuries over two-year notes shrank to as little as 17 basis points last week
Investors are becoming increasingly concerned about the US economy as the bond market edges closer to signaling a potential recession. The gap between 10-year Treasuries and two-year notes has narrowed to as little as 17 basis points, the smallest since early 2025, indicating a flattening of the yield curve. Historically, an inverted yield curve has preceded every recession since the 1960s.
The Federal Reserve has raised interest rates for the first time in three years in September, with further increases likely, as it seeks to combat inflation. This hawkish stance is altering the risk balance, driving investors to demand higher yields for longer-term securities. While some analysts believe a full inversion is unlikely, others see it as a growing possibility, especially if the Fed tightens policies to cool the economy.
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