Major yield curve signal—2s no longer inverted over 10s
On August 26, the 10-year Treasury yield rose above the 2-year yield for the first time since the yield curve inverted (a potential indicator of recession) following the Fed's rate hikes.
While the curve briefly re-inverted for a week as investor caution persisted, since September 6, the 10-year yield has remained higher than the 2-year, with the dis-inversion suggesting that recession fears may have been overcooked.
However, shorter maturities are still inverted over the 10-year, signalling lingering uncertainty in the near term and a potential economic downturn, still to come.
While there’s a rate cut coming tonight, the market might still be expecting higher interest rates over the next 12 months, (possibly due to concerns about another wave of inflation or potential fiscal spending increases if Harris wins power) but without a recession, rather, a less severe downturn.
If this is how it plays out, we can expect a dip in risk assets as we go into a non-sever economic downturn next year, followed by a recovery, once additional stimulus comes (monetary and fiscal).
In summary—a rate cut (tonight), with potential for a non-severe economic downturn into next year, followed by a recovery with Fed stimulus in the second half of next year, are helping to shape the current yield curve.
Mike
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