T-yield curve inversion touches deepest level since 1982

The yield curve inversion between the 2-year and 10-year Treasury notes deepened to its widest level in four decades. The spread between the 2-year and 10-year extended to a mark of -66 basis points early Thursday, marking the deepest inversion since 1982.

In early market action, the 10Y was up 9 basis points to 3.78% while the 2Y (US2Y) gained 9 basis points as well, which pushed the yield to 4.45%. Historically, long periods of inversion predicated future economic slowdowns.

The yield curve closing beneath -60bps for the first time since 1982, which is concerning when investors consider its historic accuracy as a leading indicator of recessions. Other yield curves also inverted by even more, with the 3m10yr curve down -6.6bps to -54.2bps.

Even Fed’s preferred yield curve (18m forward 3m yield minus the spot 3m yield) has now spent a full week in inversion territory, closing yesterday at -15.3bps, which is the lowest since March 2020.

As the yield curve inverts, Treasury ETFs come into focus. The inversion means the market expects growth prospects to weaken and hence short rates not to be maintained at current levels for an extended period of time. A spin back in time shows that anytime the longer-dated curve has inverted, slower growth and Fed rate cuts have followed with no exceptions to the rule (in every instance but one an NBER recession also followed.

While an inverted curve may hint at a recession, the United States is believed as not in a downturn at the moment but more than likely will be by the end of 2024.

Since 1990, the spread between 30-month Treasury Bills and the 10-year Treasury Note was only more inverted ahead of the 2001 recession. Since 1990, the spread between 30-month T-Bills and the 30-year long bond has only been more inverted a couple of times. Curve inversion is a very strong recession signal.