Treasury Yields Move In A Historic Direction, Indicating High Inflation, But No Imminent Recession

However some strategists contend that it may actually be indicating excessive inflation rather than an impending economic slowdown, the form of the Treasury bond market may be signaling the largest recession signal in almost 42 years.

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An already yield curve widened this week to reach its most inverted position since 1981, which is considered a warning sign for a coming recession. When short-duration yields surpass longer-duration yields, like in the instance of the 2-year Treasury yield and the 10-year yield, the yield curve becomes inverted.

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This 2-year-to-10-year spread reached its widest level since September 1981 on Wednesday, as it was negative by 211 basis points. In percentage terms, a basis point is equal to 0.01 percent.

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"Treasuries crossed the psychological threshold of -100bps, and even though it's not an economic point of difference between -99bps and -100bps, the effect does resemble a recession," said NatWest Markets' Jan Nevruzi.

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Inflation or recession?

There have been disagreements among Wall Street's strategists and economists over whether the curve inversion actually predicts a recession, and if so, when it may occur.

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According to Andrzej Skiba, head of U.S. fixed income at RBC Global Asset Management, the [inversion] means much higher inflation than expected and a higher terminal rate than previously expected. Meanwhile, the American economy is in good shape. Yield curve shape indicates sticky inflation more than any other indicator."

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The spread moved wider this week as a result of comments from Fed Chairman Jerome Powell. Congress was told by him that high inflation may force the Fed to increase interest rates sooner than expected.

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A yield of 1.57% marked the two-year end of the curve Wednesday afternoon, while a yield of 3.98% marked the 10-year end of the curve. It is the 2-year yield that most closely reflects Fed policy. In terms of economic growth, the 10-year yield is more representative.

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According to Skiba, an inverted curve historically presages a recession, but it does not necessarily mean that soft landings are off the table. According to him, a recession is a possibility in his forecast, but the strong economic data could help the U.S. avoid it.

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Due to the strong labor market and the fact that many consumers were locked into low rate mortgages before interest rates began to rise, higher interest rates have not had as much of an effect on consumers as they might have.

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By historical standards, with an inversion of this type, we can expect recession to follow, but we are not claiming a recession is inevitable over the next quarter, since the U.S. economy and the consumer are both in better shape than they were expected heading into a potential slowdown,” Skiba explained.

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In that respect, the upcoming economic data, including the employment report for February and the consumer price index on March 14, are all of greater importance, according to the professor.

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Watching for the inversion to reverse

In January 2026, futures show that the curve will come out of its inverted state, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse.

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As a result of the recession warning that the inverted curve issues during periods of high inflation versus low inflation, Golub says there has been a difference in the outcome. There was a difference between inflationary years in the 1970s and 1980s and inflationary years in the 1990s and beyond.

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When inflation is high, recessions begin on average five months before curve inversions end, but when inflation is low, recessions begin more quickly. The recession usually arrived five months before the inversions ended during low inflation periods.

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There have been 6 recessions over the past 50 years (excluding the pandemic period), followed by an average of 11 months of growth followed by another recession. It's not surprising that bearish pundits are predicting an economic downturn because the yield curve has inverted since last October," said Golub. The futures point to a recession onset around August 2025, roughly 212 years from now, based on the high inflation period.”

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According to Golub, recession is the logical outcome of the current economic situation. Rather than inverting the curve, what's at issue is the inversion of the curve. He explained, "It's reversing.". The Fed tightens rates when inflation rises. Rates begin to rise. Bond yields are lower because the market anticipates a recession, and the 1-year yield is higher because inflation is a concern. There is a difference between short and long rates."

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Short-term rates begin to decline when the Fed removes some of its tightening measures when the economy begins to weaken.

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According to Golub, the Fed uninverts the curve when it sees a recession coming on. It could also be argued that a high inflation environment is a reason why the curve takes longer to uninvert because the Fed becomes more draconian in their actions."

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Wall Street is not alone in expecting a recession sooner rather than later.

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The recession is being predicted sooner rather than later. Why is that? The steepness of the yield curve is the most important recession indicator. He explained that they are using a playbook that's been used for three recessions and how long after the Fed stopped," he explained. We should be entering this recession soon if we look at the last three recessions."