The bond market yield curve is normalizing once more from the inverted state that had raised fears of recession
A trader signals a bid in futures trading for the Standard & Poor's 500 stock index at the CME Group in Chicago on December 14, 2010.
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The ratio between the yield on 10-year and 2-year government bonds briefly normalized on Wednesday, reversing a classic recession indicator.
Following economic news showing a sharp decline in job openings and dovish comments from Atlanta Fed President Raphael Bostic, the benchmark The yield on 10-year bonds was just above the yield on 2-year for the first time since June 2022.
The respective yields were both around 3.79% in the session, with only a few thousandths of a percentage point between them.
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10-year return versus 2-year return
An inverted yield curve, where the yield is higher at shorter maturity, has been a sign of most recessions since World War II. The reason yields have risen higher at shorter maturity than at longer maturity is essentially because traders are pricing in slower growth for the future.
However, a normalization of the curve does not necessarily mean that good times are ahead. In fact, the curve usually inverts before a recession hits, meaning the U.S. could still have some tough economic times ahead.
“If you don't know any economic history, of course it's positive,” said Quincy Krosby, chief global bond strategist at LPL Financial. “But statistically speaking, if the economy actually goes into a recession or is already in one, the yield curve will normalize simply because the Fed will cut rates in response to a weakening economy.”
The price move followed a Labor Department report showing job openings unexpectedly fell below 7.7 million in July, bringing supply and demand nearly into balance after a severe imbalance since the Covid crisis. Job openings at times exceeded labor supply by more than two times, exacerbating inflation that was at its highest level in more than 40 years.
Around the same time that the job vacancy report was released, Raphael Bostic, president of the Atlanta Federal Reserve, released a statement suggesting he was willing to cut interest rates even if inflation exceeded the central bank's 2 percent target.
Lower interest rates are seen as a boost to economic growth; the Fed has kept its benchmark interest rate at its highest level in 23 years since July 2023 and is targeting a range of 5.25% to 5.5%.
While the market most closely monitors the relationship between the 2- and 10-year yields, the Fed monitors the relationship between the 3-month and 10-year yields more closely. This part of the curve is still highly inverted, with the difference now more than 1.3 percentage points.
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