Right now, the atmosphere on any lower Manhattan trading floor is almost unavoidably upbeat. More often than not, screens flash green instead of red. The conversation over coffee tends to focus on soft landings and AI-driven growth as analysts make jokes about which mega-cap will report next.
The people who watch government bonds for a living, however, appear more subdued and almost preoccupied from a few desks away. The majority of equity investors would prefer not to consider what they have been observing.
| Field | Detail |
|---|---|
| Indicator Name | 10-Year minus 2-Year Treasury Yield Spread |
| Issuing Body | U.S. Department of the Treasury |
| Current Spread (early April) | +0.52 percentage points |
| Originally Inverted | Mid-2022 |
| Track Record | Preceded every U.S. recession since 1970 |
| 10-Year Treasury Yield (recent) | Around 4.32% |
| Volatility Gauge | MOVE Index — recently above 52-week average |
| Past Recession Signals | 1990, 2001, 2008, 2020 |
| Source of Recent Analysis | RSM US LLP, Chief Economist Joseph Brusuelas |
| Type of Warning | Yield curve un-inversion plus rising long-end yields |
| Reference Data Source | Federal Reserve Bank of St. Louis (FRED) |
The straightforward line that plots interest rates against time, known as the U.S. Treasury yield curve, has been subtly acting strangely. The curve has been straightening out after more than two years of inversion, which started in the middle of 2022 while the Federal Reserve was preoccupied with combating inflation. The difference between the 10-year and 2-year notes as of early April was roughly half a percentage point in favor of the longer bond. That seems like a return to normal on paper. It isn’t.
Historically, the louder alarm has been the un-inversion rather than the inversion. Months prior to the pandemic recession, in the middle of 2019, the curve reversed. It took place prior to the housing collapse in early 2007. It occurred in late 1989 prior to the 1990 downturn, and again prior to the dot-com bust. In recent memory, it was four for four. Although it doesn’t always arrive on time, the signal appears to do so.
The stock market seems to be handling this situation differently. Strong earnings, consistent consumer spending, and a Fed that will lower interest rates have all been factors in the pricing of stocks. As it develops, it’s difficult to ignore the difference between what stock investors seem willing to overlook and what bond investors seem to be afraid of. One of them is misinterpreting the room.
According to a recent article by Joseph Brusuelas, chief economist at RSM, the sharp increase in yields and the spike in volatility related to the conflict with Iran are signs that the Treasury market is under stress. Since the start of the conflict, the 10-year yield has increased by 36 basis points to 4.32%. According to his interpretation, higher yields indicate that investors are becoming more concerned about inflation and are requesting a higher risk premium for owning U.S. debt. He added that it’s a sign that borrowing will soon become more costly for a government that is already experiencing historically high deficits.
The MOVE index, which monitors Treasury volatility similarly to how the VIX monitors stock volatility, has risen above its 52-week average to levels that Brusuelas characterized as typical of previous instances of price volatility and policy dysfunction. That statement is more difficult to understand than it seems. Government debt markets shouldn’t feel erratic. When they do, the discomfort tends to spread, frequently to stocks.
Of course, none of this ensures a recession. Yield curves can be deceptive. Previous trends can be broken. Additionally, those who attempt to predict the U.S. economy often find themselves perplexed. However, there seems to be an abnormally large gap between what stocks and bonds seem to believe at the moment. Investors appear to be so desperate for the soft-landing story that they are prepared to ignore a signal that has refused to be incorrect for 55 years. Whether they are correct to do so is still up for debate. However, those who make a living by purchasing bonds don’t seem persuaded.
