The Treasury yield curve inversion is deepening as a key warning of a coming recession flashes its strongest signal since 2007
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- On Tuesday, a closely watched recession indicator gave its strongest signal since 2007.
- An inverted yield curve between the 2 and 10 year Treasury notes has preceded recessions in 1990, 2001, and 2008.
- Fed Chair Jerome Powell has shrugged off worries of an inverted yield curve.
On Tuesday, the closely watched spread between the yields on the 10-year and 2-year Treasury notes inverted to their deepest point since before the 2008 financial crisis.
The 10-year Treasury yield on Tuesday was 2.91% compared to the 2-year yield of 3.03, a spread of 12 basis points.
The inverted yield curve — when short-term rates exceed longer-term rates — has long been a reliable recession warning, and reflects investors' waning confidence in the economy thanks to heightened expectations of risk.
An inverted yield curve preceded the 1990, 2001, and 2008 recessions, according to DataTrek. However, an inversion only predicts a downturn if it lasts for several months, as brief flashes in the 2-year Treasury yield typically don't determine much.
Already in 2022, though, the closely watched 2- and 10-year yields have inverted several times as the Federal Reserve hikes interest rates at an aggressive pace, sparking fears that it could tip the economy into a recession. Fed minutes in June suggested that the central bank will remain hawkish even after delivering its largest rate increase since 1994.
Still, Fed Chair Jerome Powell has said the central bank isn't concerned by an inverted yield curve.
Analysts have broadly warned that the Fed won't be able to achieve a "soft landing" for the economy amid soaring inflation, and many top firms on Wall Street have forecasted heightened risks for a recession. Meanwhile, inflation in May accelerated to the fastest pace in 41 years, and fresh CPI data is due Wednesday that is expected to show prices remained high in June even as some markets show signs of cooling.