The yield spread between the 2-year and 10-year US Treasuries has narrowed to 17 basis points, approaching inversion, a pattern that has preceded each of the past 8 recessions.

According to BIT (bit.com) market data, the yield spread between 2-year and 10-year U.S. Treasury bonds narrowed to 17 basis points last week, the narrowest level since early 2025. Currently, the 2-year and 10-year yields stand at around 4.9% and 5.2% respectively. The 10-year yield remains near its highest level since 2007, but as markets expect the Federal Reserve to continue raising interest rates, short-term yields are rising faster, pushing the spread closer to inversion. Markets are now pricing in at least three 25-basis-point rate hikes from the Fed over the next year. Earlier, the rise in long-term yields mainly reflected economic resilience, inflationary pressures, and fiscal risks. However, after the Fed implemented its first rate hike in three years in September, markets have begun to focus more on whether policy rates are already high enough to curb future growth. Historical statistics show that since the 1960s, yield curve inversions have preceded 8 U.S. recessions, with the average inversion of the 2-year/10-year spread occurring about 15 months before a recession, ranging from 6 months to two years. Notably, the 2022 inversion did not lead to a recession. The flattening of the U.S. Treasury yield curve has spilled over to bank stocks: the KBW Bank Index entered a technical correction zone last week, down 10% from its recent high. Zach Griffiths, head of strategy at CreditSights, said that if the curve inverts further or flattens significantly, it will weaken the market’s view that “the U.S. economy is very strong”. Gennadiy Goldberg of TD Securities believes markets have already priced in a considerable number of rate hike expectations, leaving limited room for short-term yields to continue outperforming long-term ones sharply, and the curve may steepen again in the future. The 17-basis-point spread more directly reflects the market’s repricing of policy-tightening risks rather than a foregone conclusion of a recession.