The gap between the yields on the 10-year Treasury and the two-year note is currently 0.34 percentage points. The last time it was at these levels was 2007. An inversion of the yield curve, where short-term rates are higher than long-term rates, has preceded every recession in the past 60 years according to research from the Federal Reserve Bank of San Francisco.
Chuck Self, chief investment officer at iSectors, said that the Fed would not be solely responsible for such an event, but that its current path could trigger markets to move that way.
‘It’s not going to be because the Fed will continue to raise rates and all of a sudden they’ll raise it high enough for the yield curve to invert,’ he said. ‘They’ll raise and raise and then the market will say they’ve raised too much, causing them to drop long-term yields, and that’s what will cause the inverted yield curve.’