MARKETS INSIDER
An inverted yield curve is likely after the Fed raised interest rates. Here's what that means and why it signals a recession may be imminent.
- A yield curve inversion is when short-term interest rates are higher than long-term interest rates.
- This closely-watched signal suggests markets are out-of-whack and something has to give, which often takes the form of an economic recession.
- The difference between the US 10-year and 2-year Treasury rates is just over 20 basis points.
The difference between short-term and long-term interest rates is quickly narrowing, and that means an economic recession could be right around the corner.
The yield curve, which plots the interest rate of various bond maturities, is on the verge of an inversion. That means short-term interest rates are almost higher than long-term interest rates. As of Monday, the US 10-year Treasury had a rate of 2.24%, while the US 2-year Treasury had a rate of 2.03%. Meanwhile, the 5-year and 10-year rates are already slightly inverted.
The convergence of interest rates comes as the Federal Reserve kicked off its rate hiking cycle for the first time since late 2018, and as inflation soars to 40-year highs. With many investors believing that the Fed is "behind the curve," meaning rates are still low while inflation is high, the Fed is expected to play catch-up with up to six more rate hikes this year.
WHY YIELD CURVE INVERSION IS IMPORTANT
