Global stock markets including the U.S. tumbled sharply on Monday amid escalating concerns that the world’s largest economy may be headed for a recession, pushing investors away from risk-on assets.
But at the same time, the normalization of the yield curve between the U.S. 2-year Treasury yield and the U.S. 10-year Treasury yield also caught investors’ attention. This marked the first time in over two years that the yield curve had un-inverted.
The initial inversion of the US2Y and US10Y began on July 5, 2022. Now, after over two years, the shorter-term US2Y yield has moved above the US10Y, with the curve briefly turning positive by 1 basis point.
"I'm a skeptic on the 'yield curve indicator' broadly, but some analysts say it's the 'disinversion' that is the best indicator of an upcoming recession," said analysts at Forex.com.
The US2Y yield has dropped to 3.84% on Monday, while the US10Y yield has decreased to 3.76%.
Yield curves are closely watched by investors as they provide insights into future economic activity.
An inverted yield curve, where short-term yields are higher than long-term yields, often signals a potential economic slowdown or recession. This is because it suggests that investors expect future interest rates to decline as economic growth weakens.
In contrast, a normal, upward-sloping yield curve indicates healthy economic growth, with investors expecting higher yields for longer-term investments due to anticipated economic expansion.
The S&P 500 index opened 2.7% lower at 5,200 on Monday, while the Dow Jones Industrial Average (DJIA) and Nasdaq-100 lost 2.4% and 3.1%, respectively.
The sell-off marks an extension of last week’s declines after a surprisingly weak July employment report triggered a closely watched recession gauge, Sahm rule. Investors are concerned about high valuations resulting from the AI rally, and escalating tensions in the Middle East.