The yield curve flipped, turned upside down
Yesterday the US yield curve inverted — a sign that historically has been an eerily good predictor of a potential future recession, most recently when it inverted in 2006 and 2007 before the global financial crisis of 2008.
Why does this matter?
Typically, if you were lending someone money you'd expect a higher interest rate if you were going to lend to them for a longer period, say 10 years, than a shorter one, say 2 years. The same is typically true in the billion-dollar bond markets. A longer time frame usually means more time for something to go wrong (inflation, a pandemic, a war etc.), and hence a higher interest rate — which is why when that relationship flips, investors take notice.
This time the inversion was super brief, with the spread between 10-year and 2-year treasury bonds going negative for just a brief moment on Tuesday. But brief might be enough; a yield curve inversion has preceded every US recession in the past 50 years (per the FT).
