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Bond yield curve continues to flatten, are we headed towards a recession?

Leia Klingel

Wall Street is fretting about the flattening yield curve, concerned that if the trend continues – there could soon be a clear indication that a recession is imminent.

The gap between two-year Treasury notes and the 10-year benchmark has recently touched its narrowest point in more than a decade. The yield curve is often looked to as a measure of sentiment of the economy. Typically, the yield curve steepens as investors demand higher yields for lending further in the future. A flattening yield curve can be taken as a signal that investors are hesitant about the longer term outlook for the economy.

An inverted curve, in which the yields for near-term debt exceed those for longer-dated debt, has been a reliable leading indicator for recessions since 1960.

The flat yield curve is being closely monitored by Wall Street, and has pressured equities.

While Wall Street has weighed in on the yield curve, so has the Federal Reserve. St. Louis Fed President James Bullard – a non-voting Fed member – said the yield-curve signal “should be taken seriously.” Fed chair Jerome Powell has questioned how good the yield curve is at predicting a recession in a low-inflation environment.

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